Opportunity cost
The next best alternative forgone.
Production possibility frontiers
Key definitions
Trade-off
Sacrificing one outcome to pursue another.
Consumer goods
Finished goods such as phones, cars and food.
Capital goods
Machinery used to produce consumer goods.
Unemployed resources
Idle and not used at all.
Under-employed resources
Not used to maximum capacity.
Economic growth
An increase in a country's productive capacity.
Productive efficiency
Resources fully employed; cannot produce more of one good without less of another (Pareto efficiency).
PPF
Shows maximum combinations of output with all resources used.
Outward shift
Shows economic growth — more output possible.
Inward shift
Shows falling productive capacity, e.g. war or disaster.
Key concepts
Points on the PPF are productively efficient; inside the PPF resources are unemployed or under-employed.
Producing more capital goods now may reduce consumer goods today but raise future capacity.
Movement along the PPF shows opportunity cost of reallocating resources.
Relevant tips
- Always state opportunity cost when moving between PPF points.