The production possibility frontier is a simple representation of the concepts described so far:
To demonstrate the concept of trade-offs, the model assumes there are only two types of goods in the economy, consumer goods (providing satisfaction now) and capital goods (the possibility of greater future satisfaction).
We can choose to produce any combination of consumer or capital goods with the resources we currently have available:
At Point A, not all our resources are fully employed; in other words, we could do better with what we’ve got!
At Point B, the economy is favouring consumer goods, satisfying current wants and needs at the expense of preparing for the future.
At Point C, resources are devoted to investment (capital goods), forgoing some current consumption and is more likely to make Point D possible – that is, growth in both options, providing the possibility of reduced scarcity and MORE CHOICES
As a nation and as individuals, we choose combinations of goods and service that maximize satisfaction. But we can’t have it all! Choosing one thing means forgoing the possibility of another.
However, if we can shift the curve out to the right and make the economy (or our income and wealth) bigger, we have the chance of satisfying more wants and needs than ever before.
When the economy grows, the constraints we faced previously have been relaxed.
Where are you on your own production possibility curve? Point A? Point B?
The same opportunity exists for us as individuals!
We can delay some gratification now,
and expand the possibilities
and our options in life.