Economic Terms

A diagram that plots all the possible combinations of goods and services that an economy could produce.

The diagram below shows the basic shape of a country's PPF, illustrating the the distribution and allocation of resources towards producing goods to help the economy achieve the full employment level of output. Any point on the PPF is a point that is pareto optimal, productively and allocatively efficient due to the utilisation of all the factors of prodcution in the economy.

A convex curve that graphically represents the production points for an economy where all resources are fully engaged in the production of an economy's goods and services.

The PPF is the diagram that is best used to highlight the economic problem because if an economy moves from one point on the PPF to another it involves an opportunity cost as finite and scarce resources have to be diverted from one industry to another. This increases the production of one good but decreases the production of the other. The decrease in production represents the opportunity cost and this is quantified by the gradient of the PPF at any one point.

The diagram below shows the basic shape of a country's PPF, illustrating the distribution and allocation of resources towards producing goods to help the economy achieve the full employment level of output. Any point on the PPF is a point that is Pareto optimal, productively and allocatively efficient due to the utilisation of all the factors of prodcution in the economy (Point B, C, and D). However, if the economy is producing at a point inside the PPF (Point A) this represents a feasible production point, but one that is productively inefficient. This is because at this point an economy can increase the production of one good without a resultant fall in the production of another good, due to the fact that there are unemployed resources at this production point.

An economy can produce at any point on or inside the PPF. However, if the economy tries to produce at a point beyond its existing PPF (Point E), this is an infeasible production point assuming ceteris paribus. This is because even if an economy utilises all of the economic resources available any point beyond the PPF is unattainable unless an economy experiences an increase in the quality and/or quantity of factors of production available. 

When output occurs at a point where average costs are lowest (the lowest point on the average cost curve) and all resources are fully utilised in production (actual production will position output at a point on the PPF).

Below is a diagram to show how individual firms and an economy achieve productive efficiency. For individual firms, they are charging a price at the lowest point of the average cost curve which means they are producing goods at their most productive point. For the economy to be productively efficient all firms have to be using all factors of production in the most efficient way and hence lie on the frontier of the PPF.

When output occurs at a cost higher than minimum average cost (any point other than the lowest point on the average cost curve) and at a point where some resources are not utilised (and point within and not on the PPF)

Below are a set of diagrams to illustrate when individual firms and the economy are producing at a productively inefficient point and therefore costs are not being minimised.

The amount of goods and services that an economy is capable of producing.

A measure of production representing the output produced by each input. It is usually measured by units of input.

Below is a graphic to assess that out of the following firms, Firm B is more productive than Firm A because it uses the same number of inputs but produces 10 times more units of output.

The reward for Enterprise. It is the difference between sales revenue and costs. There are many different definitions and it is important to understand the difference between normal profit and abnormal profit.

Are usually direct taxes on assessable income and wealth. The tax will be structured so that a higher proportion of the assessable item is paid in tax as the assessable amount rises e.g. income tax.

Are usually direct taxes on assessable income and wealth. The tax will be structured so that a higher proportion of the assessable item is paid in tax as the assessable amount rises e.g. income tax.

How much of their income consumers are prepared to spend.