PPF's (pro study 19/09)

Question 1

What is the basic economic problem

Answer 1

How we satisfy unlimited needs and wants with finite resources

Question 2

What does PPF stand for

Answer 2

Production possibilities frontier

Question 3

PPF definition

Answer 3

Represents what can be produced when all resources are fully employed

Question 4

What does PPD stand for

Answer 4

Production possibility diagram

Question 5

PPD definition

Answer 5

A diagram that shows the different production combinations that can be produced given a fixed resource stock

Question 6

Feasible definition

Answer 6

A set of goods that can be produced with the available resources

Question 7

Where are feasible production points on a PPF?

Answer 7

Any point on or below the PPF

Question 8

Infeasible definition

Answer 8

A set of goods that cannot be produced with the available resources

Question 9

Where are infeasible production points on a PPF

Answer 9

anything outside the PPF

Question 10

Productive efficiency definition

Answer 10

Producing a combination of goods where you cannot increase the output of one good without decreasing the output of another good.

Question 11

How can a PPF demonstrate opportunity cost

Answer 11

Opportunity cost is equal to the number of good Y units lost

Question 12

Opportunity cost definition

Answer 12

The benefit associated with the next best alternative to the action actually taken

Question 13

How is productive capacity represented by the position of the PPF

Answer 13

Large economy - PPF situated further out

Small economy - PPF situated further in

Question 14

What factors cause a shift in an economy’s PPF

Answer 14

• Changes in resources available
• Changes in productivity

Question 15

Examples of what causes an Outward shift on an economy’s PPF

Answer 15

• Discovery of new natural resources
• new inventions/innovations

Question 16

examples of what causes an inward shift on an economy’s PPF

Answer 16

• emigration
• capital flight (restirction of limiting to how much capital is in the economy)

Question 17

What is more realisitic a straight or concaved PPF

Answer 17

concave PPF

Question 18

Why is a straight PPF less realistic

Answer 18

• Perfect Mobility of factors
• Constant returns of scale

Question 19

What is perfect mobility of factors

Answer 19

Opportunity cost is the same at all points along the PPF

Question 20

What is constant returns of scale

Answer 20

When a firm increases all the factors of production by a factor and output increases by an equal factor. As a result the average cost for the firm stays constant.

Question 21

Why is a concave PPF more realistic

Answer 21

• Immobility of factors
• Diminishing returns of scale

Question 22

What is immobility of factors

Answer 22

Opportunity cost changes as you move along the PPF

Question 23

What is diminishing returns to scale

Answer 23

When a firm increases all the factors of production by a factor and output increases by a smaller factor. As a result this causes the firm’s average cost to rise.

Question 24

Productivity definition

Answer 24

the amount of output produced per unit of input

Question 25

What happens to an economy's PPF if productivity increases

Answer 25

productivity increases --> amount produced per unit increases ------> PPF expands

Question 26

What happens to an economy's PPF if productivity decreases

Answer 26

Productivity decreases --> amount prodcued per unit decreases ------> PPF contracts

Question 27

productive capacity definition

Answer 27

The maximum amount of output that can be produced by a given firm or economy

Question 28

General productivity changes

Answer 28

Parallel PPF shift e.g discovered natural resources

Question 29

Specific productivity changes

Answer 29

Rotational PPF shift e.g productivity to produce good X increases - PPf will only expand for good X

Question 30

What do we mean by consumer goods

Answer 30

Consumption - day to day goods and services

Question 31

What do we mean by capital goods

Answer 31

Investment - machinery

Question 32

How does investment affect the productive capacity of an economy

Answer 32

investment increases the productive capacity but results in less consumption now

Question 33

Allocative efficiency definition

Answer 33

Occurs when there is an optimal allocation of resources according to consumers preferences

Question 34

Why are the points outside of the PPF not allocativly efficient

Answer 34

Infeasible production points - cannot be the best allocation of resources

Question 35

Why are points inside the PPF not allocative efficient

Answer 35

Feasible production points Assume more is better then less Not allocatively efficient

Question 36

Why are points on the PPF allocatively efficient

Answer 36

Feasible production points - productively efficient because all resources are fully utilised - Many different combinations of good Y good X

Question 37

How do we know what the optimal allocation of resources in the economy is

Answer 37

When consumer utility is maximised - firms in the economy should focus on producing goods that consumers want

Question 38

utility definition

Answer 38

The satisfaction derived from consuming goods and services

Question 39

What is the allocative efficient point on the PPF when there is a strong preference for consumer goods

Answer 39

Further down the PPF - closer to the X axis

Question 40

is the allocative efficient point of the PPF when there is a strong preference for capital goods

Answer 40

Higher up the PPF - closer to the Y axis

Question 41

Resources definition

Answer 41

anything that can be used to satisfy a need or a want

Question 42

land

Answer 42

all the natural resources of the earth

Question 43

labour

Answer 43

all human effort that goes into production

Question 44

capital

Answer 44

any goods which are used to make other goods

Question 45

enterprise

Answer 45

the skills to bring together all the other resources for production and the factors of production