1.1.4 Production possibility frontiers

• Production possibility frontier (PPF):


  A PPF shows the maximum possible output of two goods assuming that all resources are used efficiently.

  
• How can a PPF show the maximum productive potential of an economy?

  The maximum productive potential of an economy is any point on the PPF (e.g. X or Y).
• How can a PPF show opportunity cost?

  With a movement along the PPF.

  E.g. when moving from X to Y, the opportunity cost of producing 3 more consumer goods is 1 capital good.
• How can a PPF show economic growth?

  By shifting outwards. This can occur when there is an improvement in the quality/quantity of factors of production.
• How can a PPF show inefficient, efficient and unattainable levels of production?

  Inefficient -> inside the PPF, e.g. W

  Efficient -> on the PPF, e.g. X or Y

  Unattainable -> beyond the PPF, e.g. Z

  
  

  Inefficient point indicates some resources are unemployed (unused). E.g. at point W, there may be unemployed workers, unused factories, etc.
• How does the allocation of resources effect economic growth?

  If the economy uses more resources to produce capital goods, then they will have more factors of production in the future. This will shift PPF outwards showing economic growth.

  
  

  This means future economic growth will be higher at X compared to Y.