+ppf/ppd

• What can production possibility diagrams illustrate?

  Resource allocation, opportunity cost, unemployment, growth

  
• What does a point on the boundary of a PPF represent?

  Productively efficient allocation of resources
• What is a production possibility diagram (PPF)?

  It shows maximum output combinations of two goods

  
• What happens as more resources are allocated to consumer goods on a PPF?

  Extra output from capital goods decreases in macro
• What do points inside the PPF indicate?

  Inefficient allocation of resources
• What does a point beyond the PPF represent?

  Unattainable production combinations
• What causes an outward shift in the PPF?

  Gaining more factors of production or improving quality
• What does a straight line PPF indicate?

  Perfect substitutability of resources
• What is the effect of higher productivity on the PPF?

  Increases output per unit of input
• What can cause an inward shift of the PPF?

  Decrease in productive potential of a country

  
• What is resource depletion?

  Decline in total stock of resources available
• What is resource depreciation?

  Decline in productivity of resources with age
• What happens in the short-run when producing more capital goods?

  Movement along the PPF occurs
• What is the long-run effect of producing more capital goods?

  Outward shift of the PPF occurs
• What are the causes of an outward shift in the PPF?

  • Higher productivity/efficiency of factor inputs
  • Better management of factor inputs
  • Increase in stock of capital and labour supply
  • Innovation and invention of new products
  • Discovery/extraction of new natural resources

  
• What are the causes of an inward shift in the PPF?

  1. Severe natural disasters
  2. Economic damage from war
  3. Large scale net migration out
  4. Long-term fall in productivity of labour
• What are some reasons an economy might operate inside its PPF?

  • Unemployment of resources
  • Inefficient use of resources
  • Economic downturns
• What policies could a government introduce to shift its PPF outwards?

  • Investment in education and training
  • Infrastructure development
  • Encouraging immigration for skilled labor
• Opportunity Cost: This is what you give up when you choose one option over another. For example, if you spend money on a video game, the opportunity cost is not being able to use that money for something else, like a book or saving it.

  Trade-Off: This is when you have to choose between two or more options because you can’t have everything. For example, if you spend time studying, you trade off spending that time hanging out with friends.
• The law of diminishing demand states that as the price of a good or service increases, the quantity demanded decreases, assuming all other factors stay the same.
• Marginal refers to the additional or extra amount of something. In economics, it is often used to describe the change in a quantity when one more unit is added or used.
• Productive capacity refers to the maximum output that an economy, business, or industry can produce using its available resources, like labor, equipment, and technology, within a given time period.
• A straight-line PPF shows that the opportunity cost (what you give up) of making one good instead of another stays the same, no matter how much you make. This happens when the resources you use to make both goods are equally good at making each one. For example, if a factory can switch easily between making shoes and making hats, and for every pair of shoes they make, they have to give up the same number of hats, the PPF would be a straight line.

  In real life, this is rare because most resources are better suited for making one good over another, but a straight-line PPF is used for simplicity.
• A straight-line PPF happens when giving up one good always costs the same amount of the other good. For example, if you have to give up 2 computers to make 1 more car, it stays the same no matter how many cars or computers you are making. This happens when resources can easily switch between making the two goods.
• An inward shift of the PPF occurs when a country's ability to produce goods and services decreases, usually due to:

  1. Natural Disasters: Destruction of resources (e.g., tsunamis, floods) reduces productivity.
  2. War and Conflict: Damages infrastructure and disrupts production.
  3. Migration: A large outflow of people reduces the labour force.
  4. Decline in Labour Productivity: A decrease in worker efficiency lowers output.
• inward shift

  • Natural Disasters: Events like tsunamis, floods, or droughts can destroy resources (like land, infrastructure, and buildings), reducing the economy's productive capacity.
  • War and Conflict: War can damage infrastructure, disrupt industries, and cause a loss of human capital, making it harder to produce goods and services efficiently
• inward shift

  • Migration: If a lot of people leave a country (due to high unemployment, for example), the country loses labor, which reduces its ability to produce goods and services.
  • Decline in Labour Productivity: If workers become less efficient over time (due to factors like poor education or health), the country’s overall productivity falls, reducing its capacity to produce goods and services.
• outward shift

  • Increase in Natural Resources: Discovering new resources, like oil, boosts production and benefits other sectors.
  • Technological Advances: New technologies increase efficiency or create new goods, like renewable energy increasing energy output.
  • Human Capital Development: Better education and training improve worker skills and productivity.
  • Increased Investment in Physical Capital: Investment in infrastructure and machinery boosts production capacity and efficiency.
• outward shift

  • Human Capital Development: Improved education and training lead to a more skilled and productive workforce, boosting overall production. For instance, better education can lead to more efficient workers and higher output.
  • Increased Investment in Physical Capital: Investing in infrastructure, machinery, and technology increases production capacity. For example, building new roads or factories can make production more efficient and expand total output.
• Capital Goods: These are goods used to produce other goods and services, like machinery, tools, and factories. They are not consumed directly but help in the production process.

  Consumer Goods: These are goods that are bought by individuals for personal use, like food, clothing, and electronics. They satisfy immediate wants or needs.

  Margin: In economics, the "margin" refers to the additional or extra change in a situation, such as the marginal cost (the cost of producing one more unit) or marginal benefit (the extra benefit gained from consuming one more unit).
• Productive Efficiency:

  • Definition: Achieved when goods and services are produced at the lowest possible cost, using resources optimally.
  • PPF Implication: Points on the PPF show productive efficiency. Points inside the PPF indicate under-utilized resources.
  • Example: If an economy is producing both consumer and capital goods, being on the PPF means resources are fully utilized between both.
• Allocative Efficiency:

  • Definition: Occurs when the mix of goods and services produced best matches society's preferences.
  • PPF Implication: Achieved when the economy produces at a point on the PPF that reflects society's preference, ensuring optimal resource allocation.
  • Example: If society prefers healthcare over defense, allocative efficiency occurs when more healthcare is produced without reducing other essentials.
• Dynamic Efficiency:

  • Definition: Refers to an economy’s ability to increase productivity and expand resources over time through innovation and technological advancement.
  • PPF Implication: Shifting the PPF outward reflects dynamic efficiency, showing growth in production capacity.
  • Example: Advancements in farming or manufacturing technology increase productivity, allowing more goods to be produced.
• Optimal production refers to the most efficient and effective use of resources to produce goods and services in a way that maximizes overall satisfaction or utility. It occurs when an economy or firm achieves the best possible balance between production inputs and outputs, considering factors such as resource availability, technology, and societal preferences.
• innovations - introduction of new ideas
• Resource depreciation

  • This is when the productivity / efficiency of resources diminishes with age and also with repeated use when producing goods and services.
• What is a production possibility diagram?

  - show the maximum potential output combinations of two goods that an economy can achieve when all its resources are fully and efficiently employed.
• If we draw a macroeconomic PPF and it shifts outwards, then we can say that there is economic growth.
• Trade-off refers to the decision-making process where choosing one option means giving up something else. It arises because resources are limited, so prioritizing one goal or activity typically comes at the expense of another.