Factors of Production and the Production Possibilities Curve

Read Sections 2.1 and 2.2. Take a moment to read through the stated learning outcomes for this chapter, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter. Also, attempt the "Try It" problems for each section before checking your answers.

The first section of the chapter will introduce you to the four factors of production that are present in the economy: labor, capital, natural resources, and entrepreneurship. Using any two factors of production, you can then learn to construct the production possibility frontier (PPF) in a two plane model. Note the economic implications of the downward slope and the bowed-out shape of the PPF curve. Also, note the meaning of producing on the curve versus inside the curve. Lastly, think about what it means to move along the curve

2.2 The Production Possibilities Curve


  • 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.