Production possibilities frontier and economic scarcity

Productions Possibilities

Production possibilities frontier

A production possibilities frontier is a reflection of one of the fundamental principles of economics, namely that scarcity is inherent to the economic condition -- no person or nation can have 'everything,' and choosing one balance of productive resources necessitates a loss in some other area if productive resources. The frontier shows the tradeoffs in the production of goods. "To understand this concept, assume that there are two goods x and y, that resources are fully employed and common to both goods, and that technology is fixed. To produce more y, resources (e.g. labor and capital) must therefore be moved from x to y. This means that the production of more y causes less x to be produced" (Production possibilities, 2009). Improvements in technology can result in the frontier as a whole moving outward, as can a greater investment of resources, and a greater emphasis on goods with capital accumulation (this means that some consumption must be given up today so that more capital goods can be produced) (Production possibilities, 2009).

Conversely, the frontier might move inward if the technological possibilities of a nation become more limited. The nation might experience a natural disaster, for example, or production facilities, due to aging and lack of reinvestment might become less efficient during an economic contraction. Less investment of resources into production and a greater emphasis on goods for consumption, rather than capital accumulation can also cause the frontier to move inward.