1.1.4 & 1.2.7 Production Possibility Frontier & Price Mechanism

Question 1

Production possibility frontier

Answer 1

a curve which shows the maximum potential level of output of one good given a level of output of all others goods in the economy

Question 2

Point on the PPF curve

Answer 2

the maximum potential output of an economy

Question 3

Point outside the PPF

Answer 3

this point is unattainable with existing resources as it’s outside the PPF

Question 4

How can the point outside the PPF be achieved?

Answer 4

• Only if there’s increases the level of production
• which we can do by increasing the quantity/quality of factors of production (more land, tech, franchise, more ppl)
• this might cause an increase in the actual output

Question 5

Point below the PPF

Answer 5

• represents less production/inefficiency due to inefficient allocation of resources
• a fall in the quantity/quality of factors of production (e.g weather hazards which might reduce land production so create a shortage of supply

Question 6

Factors of production

Answer 6

land
labour
capital
entrepreneurship

Question 7

Price Mechanism

Answer 7

the interaction of the forces of supply (firms & businesses) and demand (consumers) results in a price at which suppliers will supply and consumers will buy
- it helps ration and allocate resources

Question 8

Signalling (price mechanism)

Answer 8

• providing information to firms as to what to produce

- E.g if the price of a good rises, this signals to firms to make more of it)

Question 9

Incentive (price mechanism)

Answer 9

the profit motive

- firms will make more of something if they can profit from it

Question 10

Rationing

Answer 10

consumers can only buy something if they can pay he money required
- E.g Firms changing the price relative to the supply & demand in order to eliminate surpluses and shortages

Question 11

How can the price mechanism eliminate surpluses?

Answer 11

• At excess supply, this signals to firms that price is too high
• so they’ll lower the price to eliminate excess supply - meaning the surplus will clear and equilibrium will form at a lower price.

Question 12

Price mechanism line/ Production possibility frontier

Answer 12

the maximum capacity/productivity/combination