Production Possibility Diagrams

• PPFs


  Depict the maximum productive potential of an economy using a combination of two goods or services, when resources are fully and efficiently employed.
• PPFs show the opportunity cost of using scarce resources.
• The points on the diagram below are:

  A) Efficient

  B) Efficient

  C) Efficient

  D) Efficient

  E) Unattainable

  F) Not efficient

  
• An outward shift in the PPF is caused by economic growth. This could be due to an increase in the quality or quantity of resources (which can be achieved with the use of supply side policies).
• Economic growth means that the productive potential of the economy has increased.
• The original PPF is drawn assuming:

  A fixed amount of resources are used; and there is a constant state of technology.
• Capital goods


  Can be used to produce other goods (e.g. machinery)
• Consumer goods


  Cannot be used to produce other goods (e.g. clothing)
• Productive efficiency


  When all resources are fully and efficiently employed in the production process of a good or service.
• All points on the PPF are productively efficient because they are at their productive potential, utilising all resources available.
• Allocative efficiency


  When the resources are allocated to maximise social welfare. No one can be made better off without making someone else worse off.
• If more of both goods can be produced, it is a gain in allocative efficiency because there is an improvement in welfare.