Production Possibility Diagrams Flashcards
How can countries consume beyond their own PPF
Trade and exchange between countries
Define the PPF
It shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed
Producing more of both goods would represent ..
An improvement in allocative efficiency
If the opportunity cost for producing two products is constant..
Then we can draw the PPF as a straight line. The gradient of that line is a way of measuring that opportunity cost between two goods.
When will the PPF shift outwards
- improvements in productivity and efficiency from new technology
- more factors of production are available and used
- discovery of new natural resources
- innovation and technological advances
When will the PPF shift inwards
- natural disasters
- war and conflict
- net migration of people out of a country
- long term fall in productivity of labour
Resource depreciation
When factor inputs are used in supplying goods and services, they deteriorate and become harder and more costly to maintain (can result in a drop in productivity)
Resource depletion
When the stock of available resources actually declines e.g. forestry
What can the PPF be used to illustrate
Economic growth which is defined as a sustained increase in a country’s productive capacity
What does economic growth flow from
- increase in the stock of capital inputs
- expansion of the possible labour supply
- increase in the productivity of FOPs
- rise in productive potential bought about by innovation and entrepreneurial activity
How is economic growth shown on a PPF
Rise in a country’s productive capacity causes the PPF to shift outwards and this then allows increased supply both of consumer and capital goods
In the short term a rise in capital investment might lead to
A reduction in short term living standards as more resources are allocated to capital accumulation rather than consumption of goods and services
