Q6+-+Intro

to explain the concepts of scarcity, efficiency, choice and opportunity cost.
 * __Question__**: Explain what is meant by a production possibility curve and use a production possibility curve diagram
 * __Answer__:**

A production possibility curve is a graph demonstrating the maximum combination of goods and services that can be produced by an economy in a given time period, if all the resources in the economy are being used fully and efficiently and the state of technology is fixed. The curve PPF represents the economy’s potential output, or the limit to production for two different types of product, in this case consumer goods and capital goods.

Line PPF represents the economy’s maximum combination of consumer goods and capital goods that can be produced. Point C presents a stage at which the economy is at full level of production, with a production of Q2 Consumer goods and Q2 Capital goods, because point C is situated on line PPF. Similarly, at point B the economy would also be producing at full potential, however with Q1 consumer goods and Q1 capital goods. Point A represents a situation in which the economy is not producing at full capacity. There are factors that affect the potential and actual level of production in an economy: these include scarcity, efficiency, consumer choice and opportunity cost.

To the economist, all goods and services that have a price are relatively scarce, due to consumer’s “unlimited wants”. As a result, primary goods, or goods that are required in the production of other goods/services, present a limiting variable to production, resulting in the PPC-curve’s position. An example is oil: oil reserves are not infinite and so oil’s scarcity provides a limiting factor to the PPF. Similarly, production inefficiency provides another limiting factor. With continuous advances in the factors of production, including better training for the labour force, technological advances and entrepreneurs’ increased risk taking willingness, an outward shift of the PPF curve (to PPF1) can be achieved, meaning the economy can increase its output. Decreasing factors of production result in the opposite effect.

Consumer choice has an effect on the positioning of the point marking the economy’s actual output. Because people do not have infinite incomes, they must allocate their financial resources and therefore need to choose between alternatives. This leads to the concept of opportunity cost, which is defined as the next best alternative foregone when an economic decision is made. Any product with an opportunity cost is relatively scarce, so it will have a price and be classified as an economic good (as opposed to a free good whose supply is unlimited. E.g. Air). On the PPF, the opportunity cost for the economy’s output at point B is QF-Q1 Capital goods and QF-Q1 Consumer goods.