Production Possibility Frontier PPF

Question 1

Allocative efficiency

Answer 1

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.

Question 2

Capital goods

Answer 2

Producer or capital goods such as plant (factories) and machinery and equipment are useful not in themselves but for the goods and services they can help produce in the future. Distinguished from “financial capital”, meaning funds which are available to finance the production or acquisition of real capital.

Question 3

Concave PPF

Answer 3

A concave PPF is “bowed outwards”. This means there is a rising marginal opportunity cost as you produce more of one good. This is because there is imperfect factor mobility. E.g. labour/land/capital is more suited towards the production of one good than another.

Question 4

Consumer goods

Answer 4

Goods bought and used by consumers and households. They are the end result of manufacturing.

Question 5

Economic efficiency

Answer 5

Economic efficiency is about making best or optimum use of our scarce resources among competing ends so that economic and social welfare is maximised over time.

Question 6

Economic growth

Answer 6

An increase in the productive potential of a country – shown by an outward shift of the production possibility frontier.

Question 7

PPF

Answer 7

A boundary that shows the combinations of two or more goods and services that can be produced using all available factor resources efficiently.

Question 8

Productive potential

Answer 8

The amount of output an economy could produce if all of its resources were fully and efficiently employed.

Question 9

Trade-off

Answer 9

A trade-off implies that choices have to be made between different objectives of policy for example a trade-off between economic growth and inflation.