Factors of Production and the Production Possibilities Curve
2.2 The Production Possibilities Curve
KEY TAKEAWAYS
- A production possibilities curve shows the combinations of two goods an economy is capable of producing.
- The downward slope of the production possibilities curve is an implication of scarcity.
- The bowed-out shape of the
production possibilities curve results from allocating resources based
on comparative advantage. Such an allocation implies that the law of
increasing opportunity cost will hold.
- An economy that fails to
make full and efficient use of its factors of production will operate
inside its production possibilities curve.
- Specialization means that an economy is producing the goods and services in which it has a comparative advantage.