T1: LS3 - PPF Flashcards
Opportunity cost definition
Opportunity costs refer to the cost of forgoing the choice of producing the next best alternative good or service to produce a specific good or service.
How do consumers use OC?
Consumers decide how and what to spend their money on hence forgoing buying another product.
How are producers impacted by OC?
Producers choose what goods and services to produce compared to the choice of what they can manufacture.
How does the government use OC?
Governments use it to decide what policies to set and choose to enforce with their funds
What is a PPF?
Production possibility frontier: this demonstrates the maximum possible output of a combination of two goods or services that a firm or economy to produce when fully employing its FOP and technology.
What do PPF’s show
- maximum possible production of 2 goods and services with given factors of production
- various combinations of 2 goods or services that can be produced with Opportunity costs
What does the PPF curve show and why is it curved?
As more of one good or service is produced when compared to others, this increases the opportunity cost of producing the other G&S by a larger proportion
What is the Law of Increasing opportunity cost? (Curved PPF)
The more of one G&S that is produced, this results in a larger proportion of the other possible G&S being forgone
- E.g. 10 more laptops = 15 less TV)
What are the axis in a Macro PPF
X-axis: Services/ capital goods
Y-axis: Goods / consumer goods
What happens if a PPF is a linear curve?
This illustrates a constant opportunity cost of forgoing producing the next best alternative.
What is productive efficiency and where is it on the curve?
- Any point on the curve
- This refers to when production is efficienct resulting in the maximum possible output being produced.
- Makes it impossible to increase supply of one G&S without decreasing the other
What is allocative efficiency and where is it on the curve?
- When the G&S combination that is produced best represents the mix that society most desires.
- Exists in the curve.
What is outside the curve on a PPF
- refers to potential/ theoretical economic growth.
- Can occur from an increase in FOP or improvements in technology.
What does inside the curve represent?
- Productive inefficiency: not all FOP are being used and to their full employment.
- Results in a lower output than is possible.
- Increases from inside to the curve represent actual economic growth.
What are the three types of Efficiency?
P - productive efficiency
A - Allocative efficiency
**P* - Pareto efficiency
What is the law of diminishing returns?
The idea that additional increments of resources added to producing G&S reduces the marginal benefit of those additional increases in supply.
What is Pareto efficiency?
The idea that nobody can be made better-off without someone being detrimented
- as households benefit from more of one product, other households lose out from less of another product.
How to remember what causes theoretical economic growth?
Q2 - quality and quantity
C - capital
E - enterprise
L - land
L - labour
- can cause outward shifts in PPF without an opportunity cost
Can shifts occur only one for one product?
Yes
- Improvements in Q2Cell for only one favoured production of G&S.
