Production Possibility Curve AKA Production Possibility Frontiers Workbook NAME .......................................................................................................................... FORM ............................................................................................................................ Date ....................................................................... www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes
Transcript
Production Possibility Curve
AKA
Production Possibility Frontiers
Workbook
NAME ..........................................................................................................................
FORM ............................................................................................................................
Date .......................................................................
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Scarcity
What is scarcity? .......................................................................................................................... .................................................................................................................................................................................................................................................................................................................................... Scarcity means that people must make choices. Explain why this is the case. ..................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... What is opportunity cost? ....................................................................................................................... .................................................................................................................................................................................................................................................................................................................................... The fundamental economic problem of scarcity means that we must answer the three economic questions of:
What to produce
How to produce it
How to distribute what we produce Production possibility boundaries (or frontiers) (PPF) help us to make these three decisions. Consider an economy with four workers who can make food or computers. The table below shows how much o f each good can be made. The answer depends on how workers are allocated between the two industries. In each industry, more workers mean more output of the good. PRODUCTION POSSIBILITIES
Food workers Output Computer workers Output Total OUTPUT
4 25 0 0 25
3 22 1 9 31
2 17 2 17
1 10 3 24
0 0 4 30
Remember there are only FOUR workers in the whole economy.
What is the opportunity cost of moving from TWO workers making computers to ONE worker making computers (how many computers did you give up)? ..................................................
How much more food could you produce (you moved from TWO workers making food to THREE workers making food)? ................................................................................................................
Calculate the total output in each possible distribution of workers – the first two have been done for you.
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Which distribution of workers would you recommend and why? ...................................................................................................................................................................................................................................................................................................................................................................................................................................................................................
Look at the following figures.
Food workers Output Difference
4 25
3 22 3
2 17 5
1 10
0 0
Finish calculating the ‘difference’ column (output of 4 workers subtracted from the output of 3 workers - etc)
When do you see the BIGGEST change in output – when you move from ............ workers to .............. workers
When do you see the SMALLEST change in output – when you move from ............. workers to ....................... workers
SMALLEST CHANGE ............................................................................................................. This is called the LAW OF DIMINISHING RETURNS
The law of diminishing returns says that each extra worker adds less to output than the previous extra worker added.
The law of diminishing returns applies when one factor of production is varied (it changes), like labour in this example, but another factor is fixed – for example the number of fields to plant the crops into. As you give extra workers to make the food the number of fields is fixed. Eventually, there would be so many workers, getting in each others’s way that the amount made might actually go down.
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Explain the law of diminishing returns ................................................................................... .................................................................................... .................................................................................... ...................................................................................... ....................................................................................... ....................................................................................... .......................................................................................... .........................................................................................
Look at the first table. It shows how much food you will need to give up as you move workers from food production to computer production. Use the grid below to draw a graph to show the maximum amount of food and computers an economy can produce.
food output
25
20
15
10
5
0
5 10 15 20 25
computer output
Look at the picture on
the front cover to get an
indication of what your
graph should look like.
NB. They will NOT be
EXACTLEY the same.
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The PPF shows the MAXIMUM combinations of output that an economy can produce if it uses all available resources. The frontier shows a trade-off – to get more of one thing you have to have less of the other.
If an economy is operating ON the line – it is efficiently using ALL resources
If an economy is operating INSIDE the line – there are UNUSED resources
If an economy is operating OUTSIDE the line – someone has made a mistake – it is impossible
On your graph draw a dot to show each of the situations described above and label them:
Efficient
Inefficient
Impossible How would a COMMAND economy decide where to produce on the PPF ? .................................................................................................................................................................................................................................................................................................................................... How would a MARKET economy decide where to produce on the PPF? .................................................................................................................................................................................................................................................................................................................................... How would a MIXED economy decide where to produce on the PPF? .................................................................................................................................................................................................................................................................................................................................... Summarise what you have learnt into 5 bullet points
1.
2.
3.
4.
5.
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