Topic 1.5: Production Possibility diagrams

Question 1

Production possibility diagrams

Answer 1

illustrate different features of the economic problem: resource allocation, opportunity cost, unemployment of economic resources and economic growth.

Question 2

Opportunity cost on PPF

Answer 2

If you move along the PPF curve towards one axis, the opportunity cost increases for the opposing axis hence the factors of production are more suited towards the opposing axis.

Question 3

Law of increasing opportunity cost

Answer 3

The more we produce of one factor, the more we give up of the other factor.

Question 4

Linear line

Answer 4

illustrates constant opportunity cost

Question 5

Productive efficiency
Productive inefficiency
Beyond the curve

Answer 5

any point of the curve is productively efficient (using all the factors of production) to their maximum level (no waste).
Productively inefficienct is an unemployment of economic resources (anywhere under the curve).
Beyond the curve is unattainable with the current factors of production.

Question 6

Allocative efficiency

Answer 6

if the things that are being produced are for the consumer

Question 7

Pareto efficiency

Answer 7

If you decide to adjust your factors of production, someone may benefit but it will always lead to someone else being worse off.

Question 8

Increase in production

Answer 8

This is where we shift the PPF curve to the right by increasing the quality or quantity of the Factors of Production.

Question 9

Why does the PPF curve have a concave shape

Answer 9

This is due to the Law of Diminishing Returns

This states that as you add more of one thing while keeping other things constant, the extra benefit from each addition gets more proportinally smaller over time (why the opportunity cost gets larger if you keep moving towards one axis).