Economics Chapter on Production Possibilities Curve

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Questions and Answers

What does the intersection of the social preference curve and the production possibilities frontier signify?

  • Total production capacity of an economy
  • Maximum possible output aligned with social preferences (correct)
  • Equilibrium pricing of goods
  • Identification of resource waste

What happens to the production possibilities curve when resources become more available?

  • It shifts to the right (correct)
  • It becomes a straight line
  • It shifts to the left
  • It remains unchanged

Which of the following is NOT a shifter of the production possibilities curve?

  • Change in Technology
  • Change in resource quantity or quality
  • Change in the number of producers
  • Inflation of currency (correct)

How is economic growth commonly represented in a production possibilities graph?

<p>A rightward shift of the PPC (C)</p> Signup and view all the answers

What assumption is made about the types of goods in the production possibilities model?

<p>Only two goods can be produced (D)</p> Signup and view all the answers

What factor is directly indicated by a shift in production possibilities due to technological change?

<p>Improvement in production efficiency (C)</p> Signup and view all the answers

Which of the following concepts is different from a hypothesis based on the production possibilities model?

<p>Theories are purely theoretical musings (C)</p> Signup and view all the answers

Which of the following best describes resource allocation in the context of a production possibilities frontier?

<p>Efficiently distributing resources among limited choices (B)</p> Signup and view all the answers

What does opportunity cost refer to in economics?

<p>The profits lost from not choosing the next best alternative. (D)</p> Signup and view all the answers

Which of the following best describes allocative efficiency?

<p>Producing quantities of goods based on societal preferences. (A)</p> Signup and view all the answers

Which of the following statements about the production possibilities curve (PPC) is true?

<p>The PPC shows the trade-off between two goods. (D)</p> Signup and view all the answers

How does an increase in resources typically affect the production possibilities curve?

<p>It shifts the curve outward. (A)</p> Signup and view all the answers

In the context of opportunity cost, if an individual chooses to spend time studying instead of working, what is the opportunity cost?

<p>The salary that could have been earned during that time. (A)</p> Signup and view all the answers

What is a key factor that can lead to technological change affecting the PPC?

<p>Innovation and improvements in production methods. (C)</p> Signup and view all the answers

Which of the following describes productive efficiency?

<p>Utilizing resources to their maximum potential without waste. (B)</p> Signup and view all the answers

What impact does a change in consumer preferences have on resource allocation within an economy?

<p>It shifts resources away from less desired products towards more desired ones. (D)</p> Signup and view all the answers

What does the Production Possibilities Frontier (PPF) indicate about the relationship between two goods?

<p>Increasing production of one good requires reducing the production of another. (C)</p> Signup and view all the answers

What principle explains why the PPF is typically curved rather than linear?

<p>Diminishing returns to resource allocation. (D)</p> Signup and view all the answers

What is implied by a point inside the Production Possibilities Frontier?

<p>Resources are being utilized inefficiently. (B)</p> Signup and view all the answers

How does technological change affect the Production Possibilities Frontier?

<p>It can shift the PPF outward, allowing for more production of both goods. (A)</p> Signup and view all the answers

What factor can cause a shift in the Production Possibilities Curve?

<p>A change in the quantity or quality of resources. (A)</p> Signup and view all the answers

Why is reallocation of resources necessary in the context of increasing production diversification?

<p>It often involves increasing costs and varying efficiency. (A)</p> Signup and view all the answers

What is one likely result of underutilization of resources in an economy?

<p>A point located inside the Production Possibilities Frontier. (C)</p> Signup and view all the answers

What does the negative slope of the Production Possibilities Curve indicate?

<p>Focusing on one good hinders the production of another. (A)</p> Signup and view all the answers

Flashcards

Opportunity Cost

The potential benefits lost from choosing one option over another.

Opportunity Cost in Production

The cost of producing one good in terms of the production of another good.

Production Possibilities Graph

A graph that shows all the possible combinations of two goods that can be produced given available resources.

Productive Efficiency

Producing goods at the lowest possible cost.

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Allocative Efficiency

Producing the combination of goods that best satisfies society's wants and desires.

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Point on Production Possibilities Graph

A point on the Production Possibilities graph represents a particular combination of two goods being produced.

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Marginal Unit Cost

Cost of producing an extra unit of a commodity.

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Productive Efficiency Point

A point on the production possibilities curve that represents maximum output given available resources.

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Production Possibilities Curve

A graph showing the maximum combinations of two goods that can be produced with available resources, assuming full efficiency.

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Efficient Production

Producing goods in the most efficient way possible, utilizing all available resources.

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Inefficient Production

Production that doesn't utilize all available resources, resulting in wasted potential.

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Unattainable Production

A combination of goods production that is impossible to achieve with current resources.

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Diminishing Returns

As you produce more of one good, the additional benefit from each extra unit produced decreases.

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Resource Allocation

How resources are distributed or used for production.

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Production Possibilities Curve Shape

The curve shape shows that as you produce more of one good, the opportunity cost of making even more increases.

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Shifting PPC

When a production possibilities curve shifts to the right, it signifies economic growth. This happens due to factors like an increase in resources or technological advancements.

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PPC & Growth

A shift in the Production Possibilities Curve (PPC) represents economic growth. It indicates that a country can now produce more goods than before.

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Resource Quantity or Quality

Changes in the quantity or quality of resources can impact the Production Possibilities Curve (PPC). For example, discovering new oil reserves or improving worker skills would shift the PPC outwards.

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Technological Advancements

Technological advancements can shift the Production Possibilities Curve (PPC) outward, allowing an economy to produce more goods without any increase in resources.

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Full Employment of Resources

One of the key assumptions of the Production Possibilities Curve (PPC) is that all available resources are fully employed. This means that no resources are idle or unused.

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Fixed Resources

A key assumption of the Production Possibilities Curve (PPC) is that the amount of resources available is fixed. This includes land, labor, capital, and entrepreneurship.

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Fixed Technology

The Production Possibilities Curve (PPC) assumes a fixed level of technology. This means that there are no improvements in production methods or processes.

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Change in Technology

Technological advancements can lead to a shift in the Production Possibilities Curve (PPC). This is because new technologies can allow for more efficient production and higher output.

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Study Notes

Production Possibilities Curve and Opportunity Cost

  • A production possibilities graph (PPG) displays alternative ways an economy can use its resources.
  • The production possibilities frontier (PPF) is the line representing the maximum possible output for an economy.
  • The PPG models different ways a scarce economy can use its resources.
  • The PPG shows scarcity, trade-offs, opportunity cost, and efficiency.

Key Assumptions

  • Only two goods can be produced.
  • Full employment of resources.
  • Fixed resources (ceteris paribus).
  • Fixed technology.

Efficiency

  • Efficiency means using resources to maximize the production of goods and services.
  • An economy producing output at any point on the PPF is operating efficiently. Points inside the curve indicate inefficient or under-utilized resource use.
  • Points outside the curve are unattainable given current resources.

Productive Efficiency

  • Products are produced at the least costly way, represented by any point on the PPF.
  • Each point on the PPF shows a unique combination of goods produced when resources are fully employed.

Diminishing Returns

  • Allocating more resources to one good often leads to decreasing additional production of that good.
  • Increasing one good's production typically necessitates larger sacrifices in the production of the other good.

Resource Allocation

  • Different resources may be better suited for different goods.
  • Shifting resources between goods results in varying opportunity costs.
  • Production diversification necessitates resource reallocation and often increasing costs.

Opportunity Cost

  • Opportunity cost represents the trade-off from choosing one option over another.
  • It is the benefit or profit that could have been gained by selecting the alternative option.
  • Used in financial, business, and personal decisions.
  • If an individual invests in a project, the opportunity cost involves the profit lost from investing elsewhere.

Opportunity Cost Calculation

  • Opportunity cost = change in Y / change in X
  • Opportunity cost = slope

Production Possibility Curve Shape

  • The PPF has a negative slope due to diminishing returns.
  • Increasing one good's production comes at the expense of decreasing production of the other good.

PPC Growth

  • An economy grows as resources or technology improve, shifting the entire PPC to the right.

PPC Shifters

  • Changes in resource quantity or quality (more/better resources)
  • Changes in technology
  • Change in trade

Allocative Efficiency

  • Allocative efficiency occurs when the social preference curve intersects the PPF.
  • The point where society's desired goods/services align with the maximum possible output.

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