Key Concepts in Production and Economic Efficiency

Production Efficiency

Producing goods at the lowest possible cost, using resources optimally.

Allocative Efficiency

Resources are allocated to produce the types and quantities of goods and services that provide the most benefit to society.

Constant Opportunity Cost

A straight-line PPF, indicating resources are equally efficient in producing both goods.

Land

Natural resources used in production (e.g., minerals, forests, water).

Labor

Human effort, both physical and mental, used to produce goods and services.

Capital

Physical tools, equipment, and buildings used in production.

Entrepreneurship

The ability to combine land, labor, and capital to create goods and services. Entrepreneurs take risks and drive innovation.

Increasing Opportunity Cost

A bowed-out PPF, showing that producing more of one good requires giving up increasing amounts of the other.

Expanding Resources

An outward shift of the PPF, indicating growth in resources (e.g., labor, capital) or technological advancement.

Impact on PPF

Growth allows for more production of goods, pushing the economy beyond its previous limits.

Specialization

Focusing on the production of a particular good or service, leading to increased efficiency.

Trade

Exchange of goods/services between parties, which allows countries or individuals to benefit from specialization.

Absolute Advantage

The ability of a party to produce more of a good with the same resources than another party.

Comparative Advantage

The ability of a party to produce a good at a lower opportunity cost than another party.

Autarky

A situation where a country or economy is self-sufficient and does not engage in international trade.

What do points to the left of the PPF represent?

Attainable but inefficient production

What do points to the right of the PPF represent?

Unattainable production

How does a recession affect a country’s PPF?

The country will produce at a point below an unchanged PPF