Production Possibility Frontiers

• What is a production possibility frontier?

  A graph that shows combinations of two goods that could be produced by an economy if all of its resources are employed efficiently
• What are capital goods?

  Goods that are used to produce other capital goods and consumer goods
• What are consumer goods?

  Goods that are purchased by individuals for personal consumption
• What does any point on the PPF mean?

  That resources are being used efficiently and that the maximum productive potential of an economy has been reached
• What does any point below the PPF mean?

  Workers may be unemployed, machinery may be unused, or resources are not being allocated efficiently
• What does any point above the PPF mean?

  This level of production would be currently unobtianable, and could only be achieved if there was economic growth
• What would happen in the short run if the output of consumer goods was reduced?

  There would be a decrease in consumption and an increase in price, as well as falling living standards
• What would happen in the long run if the output of consumer goods was reduced?

  There will be economic growth because the extra capital goods being produced would cause an increase in the productive capacity of the economy, meaning the PPF would shift to the right
• What would an inward shift of the PPF mean in general terms?

  Economic decline - a decrease in the productive capacity of the economy indicating a decrease in output
• What would an outward shift of the PPF mean in general terms?

  Economic growth - an increase in the productive capacity of the economy indicating an increase in output
• What would cause a movement along the PPF?

  A change in the combination of the goods being produced, caused by the economy devoting more resources to the porduction of one good and less of the other
• What are the three most likely factors which would cause an outward shift in PPF?

  Discovery of new natural resources, development of new methods of production that increase productivity, and advancements in technology
• What are the three most likely factors which would cause an inward shift in PPF?

  Depletion of natural resources, deep recession which affects factors of production, and natural disasters that cause a destruction in productive capacity