2.2 The Production Possibilities Frontier and Social Choices - Vocabulary

Vocabulary flashcards covering key concepts from the Production Possibilities Frontier and Social Choices section.

Production Possibilities Frontier (PPF)

A curve showing the maximum feasible combinations of two goods that an economy can produce with given resources and technology; it illustrates tradeoffs and opportunity costs.

Budget Constraint

The straight-line limit on a consumer’s choices determined by income and relative prices; acts like society’s PPF but for individuals.

Opportunity Cost

The value of the next-best alternative forgone when choosing to produce or consume more of one good.

Slope of the PPF

The rate at which one good must be sacrificed to gain more of the other; equals the (variable) opportunity cost and varies along a curved PPF.

Law of Diminishing Returns

The idea that as inputs are increasingly devoted to one good, the incremental gains fall, contributing to the PPF’s curvature.

Law of Increasing Opportunity Cost

As production of a good expands, its marginal opportunity cost rises, causing the PPF to bow outward.

Productive Efficiency

On the PPF, it is impossible to produce more of one good without reducing the amount of the other; all frontier points are productively efficient.

Allocative Efficiency

The production mix on the PPF that society most desires; among productively efficient points, allocative efficiency depends on consumer preferences.

Comparative Advantage

When a country can produce a good at a lower opportunity cost than another country, making trade beneficial.

Absolute Advantage

The ability of a country to produce more of a good with the same resources; not the same as comparative advantage.

Specialization and Trade

Countries specialize in goods where they have comparative advantage and trade to raise total production and welfare.

Economic Growth

An outward shift of the PPF over time due to more resources, better technology, or improved efficiency, enabling more of all goods.

Inside the PPF

Points inside the frontier that are productively inefficient, since more of one or both goods could be produced with available resources.

Tradeoff

The opportunity cost of increasing production of one good in terms of the other; movement along the PPF requires sacrificing some of the second good.