1.1.4 - Production Possibility Frontiers Flashcards
What are consumer goods
Goods which directly provide utility (satisfaction) to consumers - goods which we consume and aren’t used to produce anything else.
e.g. chocolate bar, education, car etc. An increase in the production and consumption of consumer goods will usually mean an increase in living standards.
What are capital goods ?
Man-made goods used in production of consumer goods e.g. machines, transportation, computers. Increasing investment into capital goods is likely to lead to long term growth as they are crucial for increasing economic growth as they allow us to increase production.
What does the PPF curve show.
Micro - The various combination of 2 goods/services that can be produced with the given factors of production.
Macro - The maximum possible production of 2 good/services that can be produces with the given factors of production.
Why are PPF curves concave to the origin ?
PPF is concave to origin because of the increasing marginal opportunity costs. This is the Law of Increasing Opportunity Cost, which states that the amount of a good which has to be sacrificed for each additional unit of another good is more than was sacrificed for the previous unit.
Efficiency on a PPF curve.
What is the opportunity cost of moving from A to B ?
Moving from A to B, the opportunity cost of producing an extra 15 consumer goods is
30 capital goods.
How do we calculate opportunity cost from linear ppf’s use this example.
To produce 1 unit of the x-axis it would be y/x.
To produce 1 unit of the y-axis it would be x/y.
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Economic growth or decline:
- What does the purple arrow show ?
- What does the orange arrow show ?
● The purple arrows show that the economy has grown because it can produce more of
both goods. This growth may be achieved by increasing the quantity and/or quality of
resources.
● The orange arrows show the economy is declining as it can produce less goods than
previously. This could be caused by a number of factors such as: natural disasters;
natural resources running out; or a decrease in the quantity/quality of labour, due to
war, migration or a fall in spending on education.
What does the diagram below show ?
● The diagram below shows a fall in capital production but no change in consumer
production. This shows a fall in efficiency or a change in resources that only affects capital good manufacture.
What does the diagram below show ?
● The diagram below shows an increase in the ability to produce consumer goods but no change in capital goods which could be due to an improvement in technology that makes production of consumer goods more efficient.
What’s the different between Movements and Shifts ?
● A movement along the curve indicates a change in the combination of goods
produced: more capital goods are produced and less consumer goods are
produced, or vice versa. The same amount of resources are allocated amongst the
two goods differently.
● A shift of the curve indicates a change in the productive potential of the
economy: more consumer and capital goods can be produced or less consumer and
capital goods can be produced. There has been a change in the number of resources
and/or the technology available to the country and so their potential output has
changed.
