PPF and opportunity cost and functions of money

PPF meaning

Product Possibilities frontier

It is a graph showing all combinations of output of two goods that can be produced using all available resources and technology.

What does it mean if PPF is a straight line

marginal (extra) opportunity cost will be constant.

Opportunity cost meaning

The next best alternative that you give up in making a decision

E.g opportunity cost of buying a car is the amount of real disposable income you would’ve had if you did not buy a car

Examples of goods and services an economy should produce?

Agriculture

Manufacturing

Service

Sport

Leisure

Housing

How should goods and services be produced?

Land intensive

Labour intensive

Capital intensive

Four factors of production

Capital

Enterprise

Land

Labour

Capital goods

physical assets a company uses to produce goods and services for consumers

Consumer Goods

any good purchased for consumption and not used later to produce another consumer goods.

Technological progress’ influence on factors of production

Can cause more efficient or less efficient economies which has no link with the factors of production

PPF assumptions

• a society that produces only two goods

• the efficient use and full employment of resources 

• fixed technology

• a single snapshot in time

PPF definition

a curve on a graph that illustrates the possible quantities that can be produced of two products if both depend upon the same finite resource for their manufacture.

shows alternative combinations of two goods or services attainable when all resources are fully and efficiently employed

Below PPF curve meaning

Productive inefficiency

inefficient economy meaning not all resources were used efficiently

E.g unused land

Unproductive staff

Machinery at less than 100% capacity

On PPF line meaning

Productive efficiency

Efficient output meaning economy is efficient and uses resources efficiently

efficient allocation of resources/ efficient productivity 

Above PPF line meaning

Infeasible

An outcome which is not yet achievable as the economy needs to increase one or more of its four factors of production land labour capital enterprise

What causes an expansion of PPF

Economic growth

Increase in use of one or more of its four factors of production

• Increase in natural resources

• Technological advances

• Human capital development 

• Investment in capital 

What causes contraction of the ppf

Country’s use of one or more of the four factors of production decreases

PPF meaning

the trade off of two products with a finite resource supply for manufacture looking at the opportunity cost of the other product if we increase one product’s resources out of the finite supply.

Law of diminishing returns

as investment in a particular area increases, the rate of profit from that investment after a certain point cannot continue to increase if other variables remain at a constant. 

as investment in a particular area increases, the rate of profit from that investment after a certain point cannot continue to increase if other variables remain at a constant. 

Comparative advantage meaning

the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality 

Absolute advantage

The ability to produce more or better goods and services than other businesses or countries.

How are factors of production being used?

(land, labour, entrepreneurship, capital) are not infinite/ insatiable, they are finite so there will be an opportunity cost when using more on one instead of another. 

What is a tariff?

A tax imposed by one country on the goods and services imported from another country to influence it, raise revenues, or protect competitive advantages.

Reducing overall cost

• More efficient (helps with absolute advantage) 

• Make something with less resources- using less labour, land, entrepreneurship, capital

• Quality control (wasting less, less damaged goods/ wasted material)

• Production processes are more efficient which will bring costs down

How to lower opportunity cost

May have lower opportunity costs in another country with lower labour wages and lower standard of living and therefore lower value of currency

Functions of money

Medium of exchange

Store of value

Unit of account

Standard of differed payment

Medium of exchange

Allows goods and services to be exchanged using money instead of the barter system.

Store of value

Storing money allows individuals to save for future consumption by maintaining its purchasing power over time 

Unit of account

Money is a standard unit of measurement for the value of goods and services allowing individuals and businesses to compare prices and make informed decisions.

Standard of deferred payment

Money allows individuals and businesses to make deferred payments, such as loans, mortgages, and insurance contracts, by providing a form of transferable credit.