Economics- 1.1.4

production possibility frontiers (PPFs)

graph that shows the maximum different combinations of output of two goods that can be produced when all it’s resources are fully and efficiently employed

law of diminishing marginal returns

a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output

micro production possibility frontiers

looks at two specific products

macro production possibility frontier

looks at the choices an economy might have between producing capital goods versus supplying consumer goods and services

economic efficiency

making the best or optimum use of our scarce resources, so economic and social welfare is maximised over time

points on the PPF

an efficient allocation of scarce resources

points inside the PPF

unemployed or an inefficient allocation of resources

points outside the PPF

currently unattainable unless the country increases it’s factor resources, productivity or improves it’s technology

3 things that allows nations to consume beyond their own PPF

specialisation, trade and exchange between countries

a Pareto efficient outcome

an action that harms no one and helps atleast one person

a Pareto efficient situation

the only way to make one person better off is to make another person worse off

Pareto efficiency and the PPF

Pareto efficiency occurs on points that lie on the PPF- it is not possible to increase output of goods without reducing output of services

Pareto improvement

output of both products can increase as we move from within the PPF to points on the PPF boundary

Pareto efficiency and equity

an outcome may be a Pareto improvement but isn’t always satisfactory or fair and there can still be inequality, on a diagram the Pareto improvement involves no judgement about the equality of final distribution or overall social welfare

straight line PPF

an indication of perfect substitutability of labour or capital inputs

increasing capital goods means

an initial decrease in consumer goods then an increase in consumer goods(more capital goods means you can make more consumer goods)

causes of outward shifts in the PPF

higher productivity/efficiency of factor inputs, better management of factor inputs, in crease in the stock of capital and labour supply, innovation and invention of new products and resources, discovery of new natural resources

causes of inward shifts of PPF

damaging effects of severe natural disasters, destruction caused by war and other types of conflict, large scale migration of people out of a country, a long-term fall in productivity of labour

stock of capital

the amount of common and preferred shares that a company is authorized to issue

resource depletion

a decline in the total stock of resources available

resource depreciation

the efficiency of resources diminishes with age and with repeated use during production

causes of deforestation

expansion of large-scale industrial cattle / soy / palm oil farming, expansion of gold mining and hydro-electric dams, urban development, illegal logging, land grabbing with weak legal institutional protections

economic and social costs of deforestation

threat to livelihoods of millions in indigenous populations, environmental impact, threat to eco-systems, consequences for water supplies, huge threat to potential to achieving sustainable development and reducing extreme poverty

interventions that may reduce rates of deforestation

increase in overseas aid programmes, investment to make farming more sustainable, linking trade agreements to improved environmental and farming policies, using satellite technology to monitor and track rates of deforestation, investment in reforestation via government spending

reforestation

the process of replanting an area with trees

allocative efficiency

occurs when the value that consumers place on a good or service(reflected in the price they are willing and able to pay) equals the cost of the resources used up in production

capital goods

producer or capital goods such as plant, machinery and equipment are useful not in themselves but for the goods and services they can help produce in the future

concave production possibility frontier

‘bowed outwards’- there is a rising marginal opportunity cost as you produce more of one goods, due to imperfect factor mobility

imperfect factory mobility

labour/land/capital is more suited to the production of one good than another

consumer goods

goods bought and used by consumers and households

productive potential

the amount of output an economy could produce if all it’s resources were fully and efficiently employed

trade-off

implies that choices must be made between different objectives of policy, e.g. a trade-off between economic growth and inflation

recession

a significant, widespread, and prolonged downturn in economic activity

examples of resource depreciation

machinery and buildings breaking down over time, skills atrophying, basic infrastructure not keeping up with advancements

examples of resources depletion

human capital flight, capital scrapping, natural disasters, deforestation

human capital flight

the emigration or immigration of individuals who have received advanced training at home

capital scrapping

when capital assets are withdrawn from the capital stock at the end of their service lives

inflation

the rate of increase in prices over a given period of time

supply side policies

government attempts to increase productivity and increase efficiency in the economy

productive efficiency

producing anywhere on the boundary of the PPF