PPF Diagrams Explained
Capital goods are those that are used to produce other goods and services. Consumer goods (and services) are consumed to satisfy our needs and wants.
In the diagram opposite a number of efficiencies are shown.
Point A is an inefficient point and represents wasted resources that could be utilised to produce more goods and services.
Point B & D show Pareto-Efficient points. This means that at these points neither capital good nor consumer good production can be increased without decreasing the production of the other.
Point C shows a point that is currently unachievable using the current resources the economy has.
The PPF can be used to show opportunity cost. The diagram on the right shows that in order for an economy to increase production of consumer goods from 75 to 100 there is an opportunity cost of 16 units of capital goods.
This shows the opportunity cost which is the lost production of one good when choosing to produce another.
The PPF curve can also be used to show an increase in the productive potential of an economy by a right shift. This closely corresponds to a right shift in the macro LRAS curve. The shift in a PPF only occurs when the potential production increases. Some examples of this are.