Production Possibility Frontiers Flashcards
What do PPFs show?
The opportunity cost of productive decisions in an economy.
What does the PPF curve compare?
The production of different combinations of goods across an economy.
If a point lies on the PPF curve, what is shown?
How many units of goods can be produced when all resources are fully employed.
If a point lies below the PPF curve, what is shown?
That the economy/firm is operating below its productive potential output for either good - productive inefficiency.
If a point above the PPF curve, what is shown?
That the level of production is not yet attainable.
What would cause the PPF curve to shift to the left?
A decrease in the quality or quantity of the factors of production.
What would cause the PPF to shift to the right?
An increase in the quality and/or quantity of the factors of production.
What is economic growth?
An increase in the productive potential of an economy,due to an increase in the quality ot quantity of the factors of production. E.g. an improvement in education, an increase in resources or investment in capital goods.
What is economic decline?
A decrease in the productive potential of an economy, e.g. due to a depreciation in the value of capital stocks.
What are consumer goods?
Goods and services that are used by consumers to satisfy their needs and wants. E.g. clothing, concert tickets, a restaurant meal, etc.
What are capital goods?
Goods that are used in the production of other goods and services. E.g. roads, machines, equipment, etc.
What is productive efficiency?
When a country’s resources are fully and efficiently employed, operating at their productive potential. Producing maximum output at minimum cost.
What is allocative efficiency?
The state of the economy whereby social welfare is maximised - an output level at which price = marginal cost of production.
What are the limitations of the PPF model (3)?
1) Simplified model of reality.
2) Only two variables are considered.
3) Does not identify the point of allocative efficiency.
