Production Possiblity Frontier

Question 1

Explain the law of diminishing returns

Answer 1

As we move down the PPF, as more resources are allocated towards Good Y, the extra output gets smaller - and more of good Good X has to be given up in order to produce the extra output of Good Y

Question 2

What’s the problems with re-allocating resources?

Answer 2

• Resources are not perfectly mobile between different uses / different industries
• Resources may require re-training, the time and cost of moving resources to their new use

Question 3

What is opportunity cost?

Answer 3

• THE COST EXPRESSED IN TERMS OF THE NEXT BEST ALTERNATIVE SACRIFICED
• Choices are inevitable because human wants and needs are unlimited but the resources available to meet them are finite
• Reallocating scarce resources creates an opportunity cost. If we increase our output of Good X then fewer resources become available to produce Good Y

Question 4

What does a shift outwards of the PPF signify?

Answer 4

An improvement in productivity or an increase in the total stock of resources available to produce different goods and services
The outward shift represents an improvement in economic efficiency
In other words - long term economic growth

Question 5

What is the production possibility frontier (PPF)?

Answer 5

• A production possibility frontier represents all possible combinations of goods an economy or a firm can produce when all production factors are fully employed and used efficiently
• A PPF is normally drawn as a concave to the origin because the extra output resulting from allocating more resources to one particular good may fall

Question 6

When does the PPF shift outwards?

Answer 6

• There is an increase in the stock of factor inputs available for production
• An industry or economy achieves a rise in efficiency (productivity) meaning that more output can be produced from given resources
• Advances in the state of technology and the beneficial impact of innovation in improving production processes

Question 7

What is capital-labour substitution?

Answer 7

Replacing labour with capital, increasing productivity, but could cause unemployment to rise

Question 8

What does producing more of both goods represent?

Answer 8

an improvement in our economic welfare (providing that the products are giving consumer a positive satisfaction) and therefore an improvement in what is called allocative efficiency.

Question 9

What could cause the PPF to shift inwards?

Answer 9

• Impact of a deep economic recession
• Trends towards early retirement and delay entry into the labour market by student
• Over-exploitation of scare renewable resources
• External shocks which destroy factor resources

Question 10

What could cause the PPF to shift inwards?

Answer 10

• Impact of a deep economic recession
• Trends towards early retirement and delay entry into the labour market by student
• Over-exploitation of scare renewable resources
• External shocks which destroy factor resources

Question 11

How does the impact of a deep economic recession cause the PPF to shift inwards?

Answer 11

• Closure of businesses and scrapping capital equipment and a level of investment insufficient to compensate for capital depreciation
• Unemployed workers leave the labour market permanently

Question 12

Whats any point inside the PPF show?

Answer 12

Suggests resources are not being utilised efficiently

Question 13

What does any point outside the PPF show?

Answer 13

Not attainable with the current level of resources

Question 14

What is the PPF useful for demonstrating?

Answer 14

• Economic growth

- Opportunity cost