T1: LS3 - PPF

Question 1

Opportunity cost definition

Answer 1

Opportunity costs refer to the cost of forgoing the choice of producing the next best alternative good or service to produce a specific good or service.

Question 2

How do consumers use OC?

Answer 2

Consumers decide how and what to spend their money on hence forgoing buying another product.

Question 3

How are producers impacted by OC?

Answer 3

Producers choose what goods and services to produce compared to the choice of what they can manufacture.

Question 4

How does the government use OC?

Answer 4

Governments use it to decide what policies to set and choose to enforce with their funds

Question 5

What is a PPF?

Answer 5

Production possibility frontier: this demonstrates the maximum possible output of a combination of two goods or services that a firm or economy to produce when fully employing its FOP and technology.

Question 6

What do PPF’s show

Answer 6

• maximum possible production of 2 goods and services with given factors of production
• various combinations of 2 goods or services that can be produced with Opportunity costs

Question 7

What does the PPF curve show and why is it curved?

Answer 7

As more of one good or service is produced when compared to others, this increases the opportunity cost of producing the other G&S by a larger proportion

Question 8

What is the Law of Increasing opportunity cost? (Curved PPF)

Answer 8

The more of one G&S that is produced, this results in a larger proportion of the other possible G&S being forgone
- E.g. 10 more laptops = 15 less TV)

Question 9

What are the axis in a Macro PPF

Answer 9

X-axis: Services/ capital goods
Y-axis: Goods / consumer goods

Question 10

What happens if a PPF is a linear curve?

Answer 10

This illustrates a constant opportunity cost of forgoing producing the next best alternative.

Question 11

What is productive efficiency and where is it on the curve?

Answer 11

• Any point on the curve
• This refers to when production is efficienct resulting in the maximum possible output being produced.
• Makes it impossible to increase supply of one G&S without decreasing the other

Question 12

What is allocative efficiency and where is it on the curve?

Answer 12

• When the G&S combination that is produced best represents the mix that society most desires.
• Exists in the curve.

Question 13

What is outside the curve on a PPF

Answer 13

• refers to potential/ theoretical economic growth.
• Can occur from an increase in FOP or improvements in technology.

Question 14

What does inside the curve represent?

Answer 14

• Productive inefficiency: not all FOP are being used and to their full employment.
• Results in a lower output than is possible.
• Increases from inside to the curve represent actual economic growth.

Question 15

What are the three types of Efficiency?

Answer 15

P - productive efficiency
A - Allocative efficiency
**P* - Pareto efficiency

Question 16

What is the law of diminishing returns?

Answer 16

The idea that additional increments of resources added to producing G&S reduces the marginal benefit of those additional increases in supply.

Question 17

What is Pareto efficiency?

Answer 17

The idea that nobody can be made better-off without someone being detrimented
- as households benefit from more of one product, other households lose out from less of another product.

Question 18

How to remember what causes theoretical economic growth?

Answer 18

Q2 - quality and quantity
C - capital
E - enterprise
L - land
L - labour
- can cause outward shifts in PPF without an opportunity cost

Question 19

Can shifts occur only one for one product?

Answer 19

Yes
- Improvements in Q2Cell for only one favoured production of G&S.