9708 · 1.5
Production possibility curves flashcards
Revision flashcards for Cambridge 9708 Production possibility curves (syllabus 1.5). Flip, recall, then mark a real past-paper question.
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What is a Production Possibility Curve (PPC)?
A curve showing the maximum possible combinations of two goods or services that can be produced in an economy, given the available resources and technology are fully and efficiently employed.
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What does a point inside the PPC represent?
Productive inefficiency. It indicates that resources are not being fully utilised (e.g., unemployment) or are being used inefficiently. More of at least one good, and possibly both, could be produced.
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Why is a realistic PPC typically drawn as a curve concave to the origin?
This illustrates the law of increasing opportunity cost. As you produce more of one good, you must use resources that are less suited for its production, meaning you have to sacrifice increasingly larger amounts of the other good for each additional unit.
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What causes an outward, parallel shift of the PPC?
Long-run economic growth. This is caused by an increase in the quantity (e.g., more labour or capital) or an improvement in the quality (e.g., better technology or education) of factors of production that benefits both goods.
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Distinguish between a movement along the PPC and a shift of the PPC.
A movement along the PPC shows a change in the combination of goods produced (a choice), incurring an opportunity cost. A shift of the entire PPC shows a change in the economy's total productive capacity (e.g., economic growth).
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What does a point outside the PPC signify?
An unattainable combination of goods with the current level of resources and technology. It can only be reached through economic growth, which shifts the PPC outwards.
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What is the difference between productive and allocative efficiency in the context of a PPC?
Productive efficiency is achieved at any point ON the PPC (maximum output from given inputs). Allocative efficiency is the specific point on the PPC that represents the combination of goods most desired by society.
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What could cause a pivotal (or biased) outward shift of the PPC?
A technological improvement or an increase in resources that only affects the production of one of the two goods. For example, a new fertilizer would shift the PPC further out on the 'agricultural goods' axis but not on the 'manufactured goods' axis.