1.1.4 Production Possibility Frontiers

PPF

A graphical representation of an economy’s maximum production potential given its resources and technology

What do PPFs show the trade off between

Between producing different combinations of two goods/services

Marginal analysis

Involves analysing the cost and benefit of producing one more unit of a good

PPFs help illustrate opportunity cost through what

The slope of the curve

In PPFs, the steeper the slope the what in relation to opportunity cost?

The higher the opportunity cost

What is economic growth depicted by on a PPF

A shift of the PPF outward ( an increase in an economy’s productive capacity )

What is economic decline represented by on a PPF

A shift inward - reduction in productive capacity

Where on the PPF is efficient resource allocation shown and what does this mean

• points ON the PPF

• All resources are fully utilised

Where on the graph indicates inefficiency

Points inside the curve - resources are underutilised

Points beyond PPf vs on the PPF

• beyond : unattainable without changes in resources or technology

• On PPF - attainable

Consider an economy producing both healthcare and education. If the PPF shifts outward due to advancements in healthcare tech, what happens

the opportunity cost of education decreases, allowing for more efficient allocation of resources in both sectors

Movements along PPF

• represent changes in the quantity produced of one good while holding the production of the other constant

What are movements along the PPF typically caused by

Changes in resource allocation

Shifts in the PPF

Represent changes in the economy’s overall production potential

What are shifts in the PPF caused by

Factors like technological progress, increased resources, or improvements in labour productivity

Capital goods

Goods used to produce other goods and services

Examples of capital goods

Machinery, factories, infrastructure, and technology

What can investments in capital goods lead to

Economic growth

Consumer goods

Items purchased for personal use and consumption

Examples of consumer goods

Clothing, food, electronics and automobiles

what does the consumption of consumer goods satisfy

Immediate needs and wants

Importance of distinction between capital and consumer goods

• capital goods: essential for long term economic growth and development

• Consumer goods: satisfy current consumption desires but do not contribute directly to future growth

Example of how investing in capital can cause economic growth

Investment in new manufacturing machinery (a capital goods) can increase a country’s production capacity

Example of increasing consumer spending and effects

Increase in consumer spending on luxury cars (consumer goods) does not directly contribute to long term economic growth