4 Production possibility frontier

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 for all other goods in the economy.

Question 2

Capital goods

Answer 2

goods that are used in the production of other goods such as factories, offices, roads, machines and equipment.

Question 3

Consumer goods

Answer 3

Goods and services that are used by people to satisfy their needs and wants.

Question 4

Efficient allocation of resources on PPF

Answer 4

Any point lying on the PPF

Question 5

Inefficient allocation of resources on PPF

Answer 5

Any point inside the PPF

Question 6

Why does combinations of consumer and capital goods lying inside the PPF happen?

Answer 6

There are unemployed resources or when resources are used inefficiently.

Question 7

Combinations beyond the PPF are…

Answer 7

currently unattainable

A country would require an increase in factor resources, an increase in productivity and/or an improvement in technology to reach this combination.

Specialisation, trade and exchange between countries allows nations to consume beyond their own PPF.

Question 8

Allocative efficiency

Answer 8

Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production.

Question 9

Concave production possibility frontier

Answer 9

A concave PPF is “bowed outwards”. This means there is a rising marginal opportunity cost as you produce more of one good. This is because there is imperfect factor mobility. E.g. labour/land/capital is more suited towards the production of one good than another.

Question 10

Straight line PPF is an indication of…

Answer 10

Perfect substitutability of labour or capital inputs.

Question 11

What causes an outward shift in PPF?

Answer 11

1. Higher productivity / efficiency of factor inputs - This increases the output per unit of an input used in production
2. Better management of factor inputs - Improved management reduces waste and improves quality
3. Increase in the stock of capital and labour supply - e.g. from inward labour migration / increased capital investment
4. Innovation and invention of new products and resources - Improved production processes help to lift efficiency so that we can get more output from given inputs
5. Discovery / extraction of new natural resources (land) - Discovery of commercially viable land drives extraction

Question 12

In a PPF, a movement towards producing more capital goods…

Answer 12

requires some consumer goods to be given up in the short run (a movement along the PPF) but in the long run the increase in capital will cause the entire PPF to shift outwards so that more of both goods can be made.

Question 13

What causes an inward shift in PPF?

Answer 13

the productive potential of a country might have suffered perhaps due to:

1. Damaging effects of severe natural disasters (tsunami, floods, persistent drought and other extreme weather events)
2. The destruction caused by war and other types of conflict.
3. Large scale net migration of people out of a country e.g. when there is high unemployment or a depression.
4. A long-term fall in productivity of labour.

Question 14

Productive potential

Answer 14

The amount of output an economy could produce if all of its resources were fully and efficiently employed.

Question 15

Economic growth

Answer 15

An increase in the productive potential of a country – shown by an outward shift of the production possibility frontier.

Question 16

Trade-off

Answer 16

A trade-off implies that choices have to be made between different objectives of policy for example a trade-off between economic growth and inflation.