Production Possibility Frontiers Flashcards
What is a PPF
The Production Possibility Frontiers (PPF) model is an economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two goods/services
What does a PPF show
Many PPF diagrams show capital goods and consumer goods on the axes
Capital goods are assets that help a firm or nation to produce output (manufacturing). For example, a robotic arm in a car manufacturing company is a capital good
Consumer goods are end products and have no future productive use. For example, a watch
how would you use a PPF to depict opportunity cost using marginal analysis
To produce one more unit of capital goods, this economy must give up production of some units of consumer goods (limited resources)
When does a movement in the PPF occur
A movement in the PPF occurs when there is any change in the allocation of existing resources within an economy such as the movement from point C to D
How would you use the PPF to depict efficiency, inefficiency
Producing at any point on the curve represents productive efficiency
Any point inside the curve represents inefficiency (point E)
Using the current level of resources available, attainable production is any point on or inside the curve and any point outside the curve is unattainable (point F)
What do shifts on a PPF describe
Inward shift is economic, decline
Outward shift is economic growth
How does economic growth occur on a PPF
Economic growth occurs when there is an increase in the productive potential of an economy
This is demonstrated by an outward shift of the entire curve. More consumer goods and more capital goods can now be produced using all of the available resources
This shift is caused by an increase in the quality or quantity of the available factors of production
One example of how the quality of a factor of production can be improved is through the impact of training and education on labour. An educated workforce is a more productive workforce and the production possibilities increase
One example of how the quantity of a factor of production can be increased is through a change in migration policies. If an economy allows more foreign workers to work productively in the economy, then the production possibilities increase
How does economic decline occur on a PPF?
Economic decline occurs when there is any impact on an economy that reduces the quantity or quality of the available factors of production
One example of how this may happen is to consider how the Japanese tsunami of 2011 devastated the production possibilities of Japan for many years. It shifted their PPF inwards and resulted in economic decline
