Week 2 - production possibility frontiers Flashcards
What is a Production
Possibility Frontier/Curve?
A diagram showing the maximum combination of
two goods or services which can be produced if
all resources are used efficiently for a given level
of technology
Illustrate a point on the PPF at
which the productive
potential of the economy is
maximised
Point on curve
Illustrate a point on the PPF
which is unattainable at the
current level of technology
Point outside the curve (to the right/above)
Illustrate a point on the PPF
where the allocation of
resources is inefficient
Point inside the curve (to the left, below)
Illustrate actual economic
growth on a PPF diagram
Moving from a point inside the curve to a point
closer on the curve
Illustrate potential economic
growth on a PPF diagram
Curve expands outwards
Explain 2 causes of an
outward shift in the PPF
finding resources, immigration, investment in
capital
Illustrate opportunity cost on
a PPF
When you move up one axis, you move down the
other
Whatis the difference
between consumer goods
and capital goods?
Consumer goods provide utility directly, capital
goods do not
What is the difference
between actual and potential
growth?
Actual growth is an increase in output, potential
growth is an increase in productive capacity
Explain why we would not
want 100% of our production
to be on capital goods
We would have no consumption (and therefore
utility) right now
Explain why we would not
want 100% of our production
to be on consumer goods
We would forego consumer goods (and their
utility) in the future
Give three uses of a PPF
Show opportunity cost; show if resources are being misallocated or not, show economic growth/decline
Explain why some PPF’s are concave and others are straight lines
This depends on whether there is perfect or imperfect factor substitution. If perfect = straight line. If imperfect = concave.
Can we show allocatively efficiency on a PPF?
No
What type of efficiency can we show on a PPF?
Productive efficiency
What does a straight line PPF indicate?
Perfect substitutability of resources such as labour and capital.
What kind of opportunity cost is happening on a straight line PPF?
Constant opportunity cost
What kind of opportunity cost is happening on a concave PPF?
Increasing opportunity cost.
What is economic efficiency about?
It is about making the best or optimum use of our scare factors resources among competing ends so that economic and social welfare can be maximised over time.
When do combinations of consumer and capital goods lying inside PPF occur?
When there are unemployed resources or inputs are used inefficiently.
Give four causes of inward shifts of PPFs
Natural disasters; war; outward labour migration; a trend decline in the productivity of inputs perhaps caused by a recession which causes investment to decline
