PRODUCTION POSSIBILTY CURVE-:

In economics, a productionpossibility frontier (PPF), sometimes called a productionpossibility

curve, production-possibility boundary or product transformation curve, is a graph that shows the
various combinations of amounts of two commodities that could be produced using the same
fixed total amount of each of the factors of production. Graphically bounding the production
set for fixed input quantities, the PPF curve shows the maximum possible production level of one
commodity for any given production level of the other, given the existing state of technology. By
doing so, it defines productive efficiency in the context of that production set: a point on the
frontier indicates efficient use of the available inputs, while a point beneath the curve indicates
inefficiency. A period of time is specified as well as the production technologies and amounts of
inputs available. The commodities compared can either be goods or services.
PPFs are normally drawn as bulging upwards ("concave") from the origin but can also be
represented as bulging downward or linear (straight), depending on a number of factors. A PPF
can be used to illustrate a number of economic concepts, such as scarcity of resources (i.e.,
the fundamental economic problem all societies face), opportunity cost (or marginal rate of
transformation), productive efficiency, allocative efficiency, and economies of scale.

In addition, an outward shift of the PPF results from growth of the availability of inputs such as
physical capital or labor, or technological progress in our knowledge of how to transform inputs
into outputs. Such a shift allows economic growth of an economy already operating at its full
productivity (on the PPF), which means that more of both outputs can be produced during the
specified period of time without sacrificing the output of either good.

Conversely, the PPF will shift inward if the labor force shrinks, the supply of raw materials is
depleted, or a natural disaster decreases the stock of physical capital. However, most economic
contractions reflect not that less can be produced, but that the economy has started operating
below the frontiertypically both labor and physical capital are underemployed. The
combination represented by the point on the PPF where an economy operates shows the priorities
or choices of the economy, such as the choice of producing more capital goods and
fewer consumer goods or vice versa.
In microeconomics, the PPF shows the options open to an individual, household, or firm in a
two-good world. By definition, each point on the curve is productively efficient, but, given the
nature of market demand, some points will be more profitable than others. Equilibrium for a firm
will be the combination of outputs on the PPF that is most profitable.
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From a macroeconomic perspective, the PPF illustrates the production possibilities available to a
nation or economy during a given period of time for broad categories of output. However, an
economy may achieve productive efficiency without necessarily being allocatively efficient.
Market failure (such as imperfect competition or externalities) and some institutions of social
decision-making (such as government and tradition) may lead to the wrong combination of
goods being produced (hence the wrong mix of resources being allocated between producing the
two goods) compared to what consumers would prefer, given what is feasible on the PPF.
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10 PRINCIPLES OF ECONOMICS
Economics is the study of human behavior of how people interact to get what they want and
whether what they want is possible for them to get. Its a science in the sense that there are
uniform laws guiding the field of economics invisible forces at work that guide the market.
But its not a science in many ways, because it involves peoples decisions, which are anything
but scientifically predictable.
When approaching economics, its incredibly important to understand that the first step is to
know what to look for natural laws guiding human behavior, societys production, individual
trade, and wealth building itself. In other words, the study of economics is simply the study of
economic principles and their application. Thats about it.
This, of course, just begs the question: what are the principles of economics? Below are list of 10
basic economic principles, inspired by great economists like Henry Hazlitt, Adam Smith, and
Greg Mankiew.
The 10 Fundamental Principles of Economics:
1. People respond to incentives.
2. People face tradeoffs.
3. Rational people think within the margin.
4. Free trade is perceived mutual benefit.
5. The invisible hand allows for indirect trade.
6. Coercion magnifies market inefficiency.
7. Capital magnifies market efficiency.
8. Supply and demand magnify resource efficiency.
9. Theres no such thing as a free lunch.
10. Desires are infinite; resources are finite.
Ill go into detail with a short summary of how these economic principles work in economics. Of
course, a longer explanation is necessary but is too much for a single article. Ill continue to
write longer explanations of each principle in the following weeks. If youd like to read them,
make sure to subscribe to our newsletter at the right or at the bottom of any page on this website.
The 10 Undeniable Principles of Economics Explained:
People respond to incentives. This is an unavoidable concept found in human behavior. Its
just how people function. We respond to incentives. Incentives arent necessarily selfish in
the traditional sense, but they all appeal to our values whether conscious or subconscious.
Examples would be accepting a job to make money, donating to charity to help the poor,
going to church to learn about God anything where we essentially do what we want.
People respond to incentives.
People face tradeoffs. Its impossible to get everything you want at the exact same time. Its
impossible for me to sleep all day and work all day. Its impossible for me to grill a steak at
home while also dine at Olive Garden. This means people face tradeoffs. We have to trade
one thing for another thing theres no other option. This is why people often barter with
others. People are willing to trade 7 years of college work for the ability to become a lawyer,
lots of money for a house, and pretty much every other choice in life. People face tradeoffs.
Rational people think within the margin. Thinking within the margins means trying to get the
best result. In other words, if you have the option of choosing a good car or a perfect car, the
rational choice is the perfect car. All things being equal, the better option is better. Thinking
within the margins is essentially believing in net benefits focusing on the best thing
possible. Rational people think within the margins.
Free trade is perceived mutual benefit. When people trade in a free market, its because they
are both responding to peaceful incentives. For example, an employee trades time for money
because they want money. An employer trades money for labor because they want the labor.
Both sides are acting in a way that they think benefits them as much as peacefully possible.
This is true for all trades. People buy stuff because theyre reacting to incentives. This is a
critical concept, especially when we mix it with the above principle of rational people
thinking within the margin. People act in a way they think benefits them.
The invisible hand allows for indirect trade. The invisible hand is the market force that does
what no individual could do on his own. For example, no single country on earth has all of
the resources and industry necessary for the creation of a single pencil. It takes a dozen
companies and several countries working together through trade to make that pencil. Not all
of those who contribute to the creation of the pencil will ever meet or even know of each
other thats why its referred to as the miracle of the invisible hand. The market does more
on its own than any individual can possibly do on his own because the invisible hand allows
for indirect trade.
Coercion magnifies market inefficiency. The invisible hand operates through the free market.
That is, through people acting in a way that benefits them. The people mining lead, for
example, arent doing it because theyre thinking about your ability to use a pencil. They
dont even know where the lead theyre mining is going. Theyre acting on the basis of the
free market, and the free markets invisible hand is taking care of the rest. Using coercion
that is, manipulating the incentives people respond to focuses on less production and more
exploitation. What this means is that instead of everyone focusing on how to peacefully
produce and trade for as much as possible, it changes the rules so that its possible to just
take or force others to give you what you want. This makes about as much sense as a farmer
eating his milk cow. The more coercion in a market, the less efficient it is. For examples of
this in action, just look at any socialized nation in the history of mankind. Coercion
magnifies market inefficiency.
Capital magnifies market efficiency. Capital is the magic behind the invisible hand. It allows
people who have never met to barter. Capitalism is essentially juiced up barter economy. A
pig farmer is trading pigs for stuff at Wal-Mart hes just using currency for the sake of
making the bartering more efficient. The existence of capital means that you can produce one
thing, earn money, and trade that money for something else entirely without the person
youre trading with needing to accept what youre producing. Capital is an ingenious method
of allowing anyone to trade with anyone, as long as both are productive people who produce
more than they consume. Capital magnifies market efficiency.
Supply and demand magnify resource efficiency. Market forces work so that if theres a
demand for something as well as a potential supply of it, the market will try to unleash the
supply to meet the demand. This will eventually lead to market equilibrium where the
demands are quenched as much as possible by the market. This is honestly just an end
conclusion of the very first principle of economics people respond to incentives. Making
money filling market demands is an incentive that nearly everyone reacts to during their
lives.
Theres no such thing as a free lunch. This is a simple concept. Nothing is free. All wealth
must be earned. You cant use black magic economics to create something out of nothing.
Every bit of wealth has to be earned. Welfare gets the money from someone. Government
spending takes money from somewhere. Even if one person benefits without paying for it,
someone else has to pay for it. Theres no such thing as a free lunch.
Desires are infinite. Resources are finite. We dont live in a magical world where stuff is
created from nothing. Everything that is produced is based on a complicated, long train of
trade offs. The question isnt whether we can judge each trade off individually the
question is how we determine to make those tradeoffs. People who support socialized
medicine often completely miss this basic concept, and believe that capitalists just want the
poor to die or stay sick. This is absurd. There are only so many doctors and nurses
the question is how to take what we have and disburse it in a manner that doesnt
cause rationing and inefficiency. Thats why socialized medicine always creates health
slavery and rationing. Its not free, because nothing is free.
Studying these principles of economics will give you a road-map for understanding economic
events. Youll see why most government economic plans fail, why capitalism always works, why
socialism always fails, why peace always produces, and why war always destroys.