• Production possibility frontier (PPF): curve showing the maximum combination of goods or services that can be produced in a given period with available resources.

Consumption and investment

• Consumer goods are for present use, whereas the capital goods are to be used to increase the future capacity of the economy – in other words, for investment

Now we need to think about the economy as

a whole rather than the individual.

Production Possibility Frontiers

Capital Goods

Consumer Goods

Yo

Xo

A

BY1

X1

Assume a country can produce two types of goods with its resources – capital goods and consumer goods

If it devotes all resources to capital goods it could produce a maximum of Ym.

If it devotes all its resources to consumer goods it could produce a maximum of Xm

Ym

Xm

If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods

If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1 capital goods.

Shifts in the production possibility frontier

• Increase in the quantity or quality of resources.

• Expansion of further and higher education and government training schemes.

• Increase in investment • Development of new

technology

• How would this effect the PPF?

MCQs page 14 of workbook

Examiner tipsAlways define key economic concepts in the supported multiple and data response

questions. Marks are always awarded for this

Be prepared to annotate or draw a diagram of a PPF when answering questions on this concept. Marks are usually

available in the mark scheme

June 2012

June 2011

June 2010