The Production Possibilities Frontier (trade offs and trade)

Production Possibilities Frontier (PPF)

A graph that shows all the different combinations of output of two goods that can be produced using available resources and technology.

Productive Efficiency

Occurs when it is impossible to produce more of one good without decreasing the quantity produced of another good.

Allocative Efficiency

Occurs when the particular mix of goods produced represents the combination that society most desires.

Opportunity Cost

The value of the next best alternative that is given up when making a choice.

Law of Diminishing Returns

As additional increments of resources are added to producing a good, the marginal benefit from those additional increments will decline.

Comparative Advantage

When a country can produce a good at a lower opportunity cost than another country.

Scarcity

The limited nature of society's resources.

Tradeoffs

The alternatives that must be given up when making a decision.

Economic Growth

An increase in the capacity of an economy to produce goods and services, represented by an outward shift of the PPF.

Inefficient Production

Occurs when resources are not used to their full potential, lying inside the PPF.

Unattainable Production

Combinations of goods that cannot be produced with the available resources, lying outside the PPF.

Slope of the PPF

Indicates the opportunity cost of producing one good over another; the steeper the slope, the higher the opportunity cost.