1.1.4 Production Possibility Frontier

• What's the definition of production possibility frontier?

  It's a diagram which shows the different combinations of goods which can be produced if all resources are fully and efficiently utilised.

  It shows the trade-off between producing different combinations of two goods/services.
• Opportunity Cost and Marginal Analysis

  Opportunity cost is the cost of choosing one option over another.

  
  

  Marginal analysis involves analyzing the cost and benefit of producing one more unit of a good.

  
  

  PPF helps illustrate opportunity cost through the slope of the curve. The steeper the slope, the higher the opportunity cost.
• Economic Growth or Decline

  Economic growth is depicted by a shift of the PPF outward, showing an increase in an economy's productive capacity.

  
  

  Economic decline is represented by a shift inward, indicating a reduction in productive capacity.
• Efficient or Inefficient Allocation of Resources


  Points on the PPF represent efficient resource allocation, where all resources are fully utilized.

  
  

  Points inside the curve indicate inefficiency, where resources are underutilized.
• Possible and Unobtainable Production


  Points on the PPF are attainable given current resources and technology.

  
  

  Points beyond the PPF are unattainable without changes in resources or technology.
• What are capital goods?

  -Goods that are used in the production of other goods (e.g factories, offices, roads)

  -They are not in immediate consumption and are mainly used to produce consumer goods

  -Investment in capital goods can lead to economic growth.
• What are consumer goods?

  -Goods and services that are used by people to satisfy their needs and wants. They are purchased for personal use and consumption

  -They are in immediate consumption
• Importance of the Distinction between Capital and Consumer goods

  Capital goods are essential for long-term economic growth and development.

  
  

  Consumer goods satisfy current consumption desires but do not contribute directly to future growth.
• What's the definition of production productivity curve

  It's a curve which shows the maximum potential level of output of one good given a level of output for all others good in the economy
• What's the definition of margin

  It's a point of possible change
• Movements along the PPF

  Movements along the curve represent changes in the quantity produced of one good while holding the production of the other constant.

  
  

  Typically caused by changes in resource allocation
• What happens when the curve shifts outwards?

  -A shift outwards shows economic growth and that they are using their resources efficiently

  -This shift is shown if there is an increase in the productive potential of an economy
• What happens when the curve shifts inwards?

  -An inward shift shows a decrease in economic growth and that they aren't using their resources efficiently

  -This shift is shown if there is a decrease in the productive potential in the economy
• Causes of outward shift of PPF

  -Higher productivity/ efficiency of factor inputs

  -Better management of factor inputs

  -Increase in the stock of capital and labour supply

  -Innovation and invention of new products and resources

  -Discovery/extraction of new natural resources (land)
• Causes of inward shift of PPF

  -Damaging effects of natural disasters (e.g droughts, earthquakes, floods)

  -Destruction/loss of factor inputs caused by civil war and other forms of conflict that last for many years

  -Large scale net outward labour migration (e.g due to an economic depression that leads to a brain drain of skilled workers)
• What's the definition of productive efficiency?

  Productive efficiency means that production will take place at the lowest cost
• What's the definition of allocatively efficient?

  -Allocatively efficient is when social welfare is maximised

  -All goods and services meet the needs and wants of society
• Define opportunity cost

  Opportunity cost is the cost of the next best alternative foregone as a result of an economic decision