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The Production Possibilities

24 April, 2015 - 11:52

Learning Objectives

  • Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed-out shape.
  • Use the production possibilities model to distinguish between full employment and situations of idle factors of production and between efficient and inefficient production.
  • Understand specialization and its relationship to the production possibilities model and comparative advantage.

An economy’s factors of production are scarce; they cannot produce an unlimited quantity of goods and services. A production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce. It illustrates the production possibilities model. In drawing the production possibilities curve, we shall assume that the economy can produce only two goods and that the quantities of factors of production and the technology available to the economy are fixed.