1.1.4 Production possibility frontier

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    a) The use of production possibility frontiers to depict:
    Economic growth or decline
    The maximum productive potential of an economy
    In most simplistic economy – we assume there are only 2 produced goods, a raft and food
    PPF shows maximum potential output of an economy when all its resources are fully employed
    Opportunity cost (through marginal analysis)

    Efficient or inefficient allocation of resources
    PPFs can be curved in nature due to law of diminishing marginal returns – due to opportunity cost
    Shape is explained by changes in trade-off between two goods as an economy specialises production in one industry
    Factors of production in an economy are better suited to one industry than another, so when the output of one industry (butter) approaches its maximum the extra land, labour and capital used will be taken from the other industry (drums)
    Resources are less efficient at producing butter than they were at making drums, so increase in butter production is lower than the fall in drums
    So as output of a good approaches maximum level – opportunity cost of any extra output will increase
    Law of DMR: As you add more units to the production of a good or service, its output will increase at a decreasing rate (graph)
    Possible and unobtainable production

    Inefficient: Not all factors of production are being fully employed or utilised (no opportunity cost)
    Efficiency: All factors of production are being employed or utilised to their full potential
    Unattainable: Given the factors of production that we have available

     

    Economic decline shown by an inward shift in PPF
    A decrease in quality and quantity of resources and factors of production causes productive potential of the economy to decrease – economic decline
    Shifting PPF curve uses either more/less resources or resources of a greater/lesser quality
    Reduces opportunity cost of producing either capital or consumer goods, since more goods can be produced overall
    Movement along
    Movement along PPF uses same number and state of resources
    E.g. shifts production from fewer consumer goods to more capital goods – incurs opportunity cost
    c) The distinction between capital and consumer goods
    Capital good – any good deployed to help increase future production – most common capital goods are property, plant and equipment, or PP&E.
    Consumer goods – any goods that aren’t capital goods; goods used by consumers – no future productive use

     

     

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