Production Possibility Frontier Flashcards
Define PPF
A curve showing the maximum possible alternative combinations of two goods e.g. capital and consumer goods than an economy can produce using all the available factors of production efficiently. Moving from one point on the curve to another indicates the opportunity costs of increasing one item’s production in terms of the units of the other forgone.
What does the PPF depict
It depicts the maximum productive potential of an economy when resources are fully and efficiently employed and can show the opportunity cost of using the scarce resources
The law of diminishing marginal returns states that…
as successive units of a variable factor is added to a fixed factor that each extra unit of the variable factor adds less output than the one before it.
Original PPF curve shows
fixed amount of resources and constant state of technology
An increase in the quantity or quality of resources does what to the PPF
An increase in quantity or quality of resources shifts the PPF outwards so the productive potential of the economy increases and there is economic growth
When is there a movement along the PPF curve
Moving along the PPF uses the same number and state of resources and shifts production e.g. from fewer consumer goods to more capital goods. This incurs an opportunity cost.
Define capital good
indirectly satisfies wants
Define consumer good
directly satisfies wants
Define productive efficiency
producing the greatest value output out of the least value inputs – producing at lowest average total cost
Define allocative efficiency
producing the correct bundle of goods to maximise welfare – price = marginal cost
Producing below curve is
inefficent as resources are not used to their full productive potential
The PFF assumes
a fixed amount of resources are used and constant state of technology
Moving along the pff means
using same number and state of resources but production shifts from fewer consumer goods to more capital goods incurring an opportunity cost
Allocative efficiency shows
how goods are distributed in society
A shift in ppf increases goods produced meaning an
improvement in welfare
