An illustration of trade offs facing an economy that produces only two goods
Draw diagrams showing opportunity cost, actual and potential output
Draw diagrams showing economic growth and actual output
Production Possibility Curves/Production Possibility Frontiers
Points A and B on the PPF shows the maximum that can be produced with existing resources and technology, it is a point of productive efficiency
The negative slope of the PPF reflects basic scarcity
The law of diminishing returns implies a convex PPF: as resources are transferred from one use to another, the increment in output becomes smaller, the opportunity cost larger
Resources are being released in the wrong combination
The resources being released are less and less suited to the new use
Area U inside the frontier is productively inefficient: more of one good could be produced without sacrificing any of the other:
Under market systems it is called unemployment
Under central planning it is called inefficiency
Impossible points outside the PPF can only be reached through:
Trade
The discovery of more resources
Increased labour productivity from greater education and training
Increased capital productivity from an increase in technological knowledge