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#Production possibility curve how to

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#Production possibility curve how to

PPF and recessionĪ recession can be shown by output falling below the production possibility frontier (from A to B).Īny government faces a trade-off in how to use scarce resources and tax revenue. Similarly, a decline in investment can enable more consumer goods in the short-term but can lead to lower rates of economic growth. Increase in capital goods has an opportunity cost of fewer consumer goods, but in long-term can enable economic growth. However, if the investment is successful, then in the long-run, productive capacity will increase and the PPF curve will shift to the right.building new factories) then in the short-term, consumption will go down. If more resources are devoted to capital goods (e.g.One choice an economy faces is between capital goods (investment) and consumer goods. Production possibility frontier and investment If the PPF curve shifts to the right, then it is similar effect to the LRAS shifting to the right Note: there is a link between macroeconomics and the long-run aggregate supply curve.

If there is an increase in land, labour or capital or an increase in the productivity of these factors, then the PPF curve can shift outwards enabling a better trade-off. On the PPF curve, it is impossible to increase one choice, without causing less production of the other. Pareto efficiency is any point on the PPF curve.At point D, we can increase both goods and services without any opportunity cost.

At point D, the economy is inefficient.

But, the opportunity cost is that output of goods falls from 22 to 18.

Moving from Point A to B will lead to an increase in services (21-27).

Diagram of Production Possibility Frontier A production possibility frontier shows how much an economy can produce given existing resources.Ī production possibility can show the different choices that an economy faces.įor example, when an economy produces on the PPF curve, increasing the output of goods will have an opportunity cost of fewer services.