Production possibility frontier Flashcards
Production possibility frontier
A curve which shows the maximum potential level of output of one good given a level of output for all other goods in the economy.
Capital goods
Goods that are used in production of other goods such as factories, offices, roads, machines and equipment.
Consumer goods
Goods and services that are used by people to satisfy their needs and wants.
Why can’t the economy produce at any point outside its existing PPF?
PPF shows the maximum potential output of an economy.
Growth in the economy/increase in productive potential will…
Shift the PPF outwards
Fall in productive potential of an economy will…
Shift the PPF inwards
Economic growth
An increase in the productive potential of a country – shown by an outward shift of the production possibility frontier.
Economic growth can happen if:
- Quantity of resources available for production increases – for example an increase in the number of workers in the economy or new factories or offices might be built
- Quality of resources increases – education will make workers more productive and technical progress will allow machines and production processes to produce more with the same amount of resources
What does a point on the PPF curve show?
There is full and efficient utilisation of resources at all points along the PPF curve.
What does a point inside the PPF curve show?
There is an underutilisation of resources or an inefficient use of resources.
Economic efficiency
Making the best use of our scarce resources among competing ends so that economic and social welfare is maximised over time.
Allocative efficiency
Occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production.
