Production possibility Frontiers (PPF)

Question 1

PPF

Answer 1

A PPF shows alternative combinations of two goods or services attainable when all resources are fully and efficiently employed

Question 2

Causes of outward shift in PPF:

Answer 2

• Higher productivity/ efficiency of factor inputs
• Better management of factor inputs
• Increase in the stock of capital and labour supply
• Innovation and invention of new products and resources
• Discovery/ extraction of new natural resources

Question 3

Causes of inward shift of PPF

Answer 3

• Damaging effects of natural disasters such as drought, a tsunami, an earthquake and sever floods
• Large scale net outward labour migration e.g. due to economic depression that leads to a brain drain of skilled workers
• A trend decline in the productivity of inputs perhaps caused by a persistent recession which causes net investment to be negative

Question 4

PPF diagram

Answer 4

• Normally we draw a PPF as concave to the origin. E.g. when we move down along the PPF, as more resources are allocated towards good Y the extra output gets smaller
• This is explained by the law of diminishing marginal returns; it occurs because not all factors inputs are equally suited to producing items leading to lower productivity
• Land, labour and capita are imperfect substitutes
• Points on the existing PPF line are all efficient output combinations
• Points outside the PPF line are not yet attainable
• Points inside and outside the PPF line are inefficient combinations. I.e. not all resources are fully utilized

Question 5

Resource depreciation

Answer 5

• Machinery
  -Buildings
• Skills atrophy
• Basic infrastructure
• Human capital flight
• Capital scrapping
• Natural disaster
• Deforestation