Production possibility frontier

Question 1

Production possibility frontier (PPF)

Answer 1

Illustrates the maximum output for the economy given existing resources when you consider 2 types of goods/services. It can be drawn for any 2 products or categories.

Question 2

Types of PPF

Answer 2

Macro- categories: consumer and capital goods (vague)
Micro- 2 goods/services: goods and services, vehicles and houses

Question 3

PPF Explained

Answer 3

Assume we have a firm that is selling 2 goods. Given their existing resources, they will only be able to produce a certain amount of each good.

Question 4

Efficiency

Answer 4

The points that lie on the PPF are all pareto efficient, but not all points are allocatively efficient.

Question 5

Trade off

Answer 5

Choosing/compromising between conflicting objectives. There are trade offs between the 2 goods as if you produce more of one good, you have to produce less of the other good.

Question 6

Pareto efficient

Answer 6

Otherwise known as productively efficient, it means that all resources have been used efficiently to maximise output. Cost of production has also been kept as low as possible.

Question 7

Allocatively efficient

Answer 7

Meaning that the production is aligned with consumer preferences.

Question 8

PPF shift

Answer 8

If productivity increases (supply side) then the PPF shifts out. This would be because of increased input such as more workers for example. This shows growth and can shift in if the inverse occurs.