1.1.4 Production possibility frontiers

What are the 3 economic questions

1. What should be produced?

2. How should production occur?

3. For whom should production take place?

What are the production possibility frontiers (PPFs)?

Diagrams that shows maximum potential level output for 2 goods that an economy can achieve when all its resources are fully and efficiently employed, given the level of technology available. It is very useful for understanding of opportunity cost

What do we illustrate with PPFs?

Scarcity and opportunity cost

In what economics do we use PPFs?

Both micro and macro

How PPFs work in macro?

They show the maximum possible output combinations of consumer goods and capital goods an economy can achieve when all their resources are fully and efficiently employed

How PPFs works in micro?

They show the maximum potential output combinations of 2 goods that a firm can achieve when fully using all factors of production

How do we normally draw PPFs and why?

As concave because not all factors of production are equally productive as we move them

What is the law of increasing opportunity cost?

Factors are not perfectly mobile

Explain what each point represents

A- productively inefficient, not using all the resources

B- productively efficient, more resources employed in making capital goods

C- productively efficient, more resources employed in making consumer goods

D- unobtainable with given resources. However if an economy acquires better workers and/ or capital equipment, growth will occur and D will be achievable. There is no opportunity cost for this

What happens if production potential increases/ decreases?

Increases => curve shifts outwards

Decreases => curve shifts inwards

What causes outward shift?

• Higher productivity/ efficiency of factors of production e.g more skilled workers, better machinery

• Increase in quantity or quality of resources

• Discovery of new natural resources

• Increase in investment

What causes inward shift?

• natural disasters

• Wars

• Emigration

• Change in government policy e.g Brexit

What is allocative efficiency?

Allocative efficiency occurs when an economy produces a combination of goods and services that exactly matches the needs and wants of consumers, at a price they are willing to pay, resulting in no surplus or shortage.

What is economic growth, and how is it represented on the Production Possibility Frontier (PPF) curve?

Economic growth is an increase in the productive capacity of an economy, represented by an outward shift of the PPF curve, indicating that the economy can produce more goods and services than before.

What is dynamic efficiency?

Short and long term run considerations → allocation is reached over time. Right pace of innovation and investment to improve production which helps to reduce long-run average cost. E.g investment in new technology increases labour productivity