A: Economic Methodology And Economic Princples

Question 1

What is a PPF (what does it show)?

Answer 1

A production possibility frontier diagram (PPF) is a diagram that depicts the maximum combinations of two goods that can produced by an economy, assuming all resources are fully employed and used efficiently.

Question 2

What is the difference between a macro PPF and a micro PPF?

Answer 2

A micro PPF has axes labelled - good x and good y whereas a macro PPF has axes labelled - capital goods and consumer goods

Question 3

Will this factor cause an inward or outward shift of the PPF?

Technological improvement that lead to increased productivity of capital equipment

Answer 3

Shift OUTWARDS

Question 4

Will this factor cause an inward or outward shift of the PPF?

Discovery of new resources, e.g. oil and gas

Answer 4

Shift OUTWARD

Question 5

Will this factor cause an inward or outward shift of the PPF?

Improvements in education and training that lead to a more productive workforce

Answer 5

Shift OUTWARD

Question 6

Will this factor cause an inward or outward shift of the PPF?

Changes that lead to an increase in working population, e.g. increases in immigration or a raised retirement age

Answer 6

Shift OUTWARD

Question 7

Will this factor cause an inward or outward shift of the PPF?

Disasters such as earthquakes or floods/wars/global warming

Answer 7

Shift INWARDS

Question 8

Will this factor cause an inward or outward shift of the PPF?

A prolonged recession

Answer 8

Shift INWARDS

Question 9

Any point ON the PPF represents a ___ efficient allocation of resources

Answer 9

Any point on the PPF represents a PRODUCTIVELY efficient allocation of resources

Question 10

Why are points inside the PPF considered an inefficient allocation of resources?

Answer 10

It is possible to produce more of one good without sacrificing any of the other.

Question 11

Reallocating resources from producing one good to producing another good will incur an ____

Answer 11

OPPORTUNITY COST

Question 12

If we draw a macroeconomic PPF and it shifts outwards, then we can say that there is ___ economic growth.

Answer 12

LONG RUN

Question 13

Using efficiency terminology, describe a point inside the PPF curve.

Answer 13

Points inside the PPF curve are productively inefficient

Question 14

What is allocative efficiency?

Answer 14

Allocative efficiency exists when an economy’s factors of production are used to produce the combination of goods and services that maximises society’s welfare.

Question 15

True or false? A PPF cannot show allocative efficiency.

Answer 15

TRUE ish. PPF can show productive but not allocative efficiency at face value. IT COULD be showing allocative efficiency but we wouldn’t know from face value because the allocatively efficient point on the PPF is the one that best reflects society’s preferences for particular goods and services.