Micro 1.1.4

Question 1

What is the PPF?

Answer 1

Production possibility frontier

Used to illustrate maximum output an economy can produce if economy is maximising use of scarce resources

Question 2

How does PPF relate to factors of production?

Answer 2

Shifts out if productive potential rises e.g new technology, division of labour, labour force increase in size or quality. Also new resources discovered.

Question 3

What is Pareto efficiency?

Answer 3

When it is impossible to reallocate resources to make one preference criterion better without making another worse

Question 4

When does PPF swivel

Answer 4

When improved technology/labour only improves one aspect of the economy

Question 5

What shows opportunity cost in the PPF?

Answer 5

Gradient- change in one product / change in the other

E.g lose 40 units of wheat if making 100 units more of cotton

Opportunity cost is 4/10 unit of wheat per unit of cotton

Question 6

Why is PPF curved sometimes and straight other time?

Answer 6

Curve shows diminishing returns.

As we add more resources to a good we get less marginal output (the rate at which the output increases by, slows)

Marginal opportunity cost goes up

Straight line means marginal opportunity cost remains constant