Production Possibilities Model and Economic Growth

Vocabulary flashcards reviewing key concepts, definitions, and mathematical relationships from the Production Possibilities Model, efficiency, waste sources, and economic growth notes.

Three Basic Assumptions of the Production Possibilities Model

The assumptions that each country has a given amount of resources, has a given technology, and only produces two goods.

Land

Natural resources (e.g., topsoil, mineral wealth, clean water, & air) that are not distributed equally over the world.

Labor

A human resource consisting of the size of the labor force, based on the number of people who are willing to work.

Productivity

The ability to produce, which is determined by human capital investment.

Human Capital Investment

Investments made in people to increase their ability to produce output (e.g., education, training, healthcare).

Capital

Produced resources consisting of equipment, tools, and structures used to assist workers in production.

Specialized Capital Goods

Goods used to produce output (e.g., computers in offices, refrigerators, ovens).

Given Technology

The knowledge available to combine inputs into outputs, serving as a set of recipes for growing food, building cars, treating disease, and educating people.

Points ON the Frontier

Points representing the maximum production of guns & butter that is possible to produce today with given resources and technology.

Points ABOVE the Frontier

Points representing impossible combinations of guns & butter due to a lack of required resources and technology.

Points INSIDE the Frontier

Points representing less desirable productions of guns & butter that can be produced, but points on the frontier are more desirable.

Moving Up the Frontier

Reallocating resources & technology from butter production (loss) to guns production (gain) by transferring land, labor, & capital to produce less butter & more guns.

Moving Down the Frontier

Reallocating resources & technology from guns production (loss) to butter production (gain) by transferring land, labor, & capital to produce less guns & more butter.

Opportunity Cost (along a frontier)

The next best alternative given up when making a choice, calculated as $\text{Opportunity Cost} = \frac{\text{Loss}}{\text{Gain}}$.

Efficiency in Production

A condition where it is impossible to produce more of one good without producing less of another, occurring at points ON the frontier.

Positive Efficiency

A condition in production where there is no waste or slack.

Inefficiency in Production

A condition where it is possible to produce more of one good without producing less of another, occurring at points INSIDE the frontier.

Negative Efficiency

A condition in production where there is waste or slack.

Unemployment

The non-use of resources where resources are not all being used, resulting in waste and inefficiency.

Underemployment

The mis-use of resources, defined as working below your skill level.

Relationship Between Unemployment and Underemployment

A direct relationship where an increase in unemployment causes an increase in underemployment, as individuals unable to find jobs in their field find work below their skill level.

Economic Growth

The expansion of potential output over time, represented as a frontier shift outward over time.

Increase in the Labor Force

A source of economic growth resulting from population growth & immigration that allows an economy to produce more output and shift the frontier out.

Investment in Physical Capital

Replacing worn-out capital and investing in new capital (e.g., factories, equipment), which enlarges the capital stock.

Technological Change

The creation of new knowledge (new recipes) that enhances the ability to produce output and is responsible for half of economic growth, making it the major long-run benefit from economic growth.