Refer your book for Twin themes of Economics and Micro & Macro Economics.

The Production Possibilities Frontier Definition of production possibilities frontier: a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology. Example: an economy that produces two goods, cars and computers. a. b. c. If all resources are devoted to producing cars, the economy would produce 1,000 cars and zero computers. If all resources are devoted to producing computers, the economy would produce 3,000 computers and zero cars. More likely, the resources will be divided between the two industries. The feasible combinations of output are shown on the production possibilities frontier

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Because resources are scarce, not every combination of computers and cars is possible. Production at a point outside of the curve (such as C) is not possible given the economys current level of resources and technology. Production is efficient at points on the curve (such as A and B). This implies that the economy is getting all it can from the scarce

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resources it has available. There is no way to produce more of one good without producing less of another. 5. Production at a point inside the curve (such as D) is inefficient. a. b. This means that the economy is producing less than it can from the resources it has available. If the source of the inefficiency is eliminated, the economy can increase its production of both goods.

6. The production possibilities frontier reveals Principle #1: People face tradeoffs. a. b. Suppose the economy is currently producing 600 cars and 2,200 computers. To increase the production of cars to 700, the production of computers must fall to 2,000.

7. Principle #2 is also shown on the production possibilities frontier: The cost of something is what you give up to get it (opportunity cost). a. b. 8. The opportunity cost of increasing the production of cars from 600 to 700 is 200 computers. Thus, the opportunity cost of each car is two computers.

The opportunity cost of a car depends on the number of cars and computers currently produced by the economy. a. b. The opportunity cost of a car is high when the economy is producing many cars and few computers. The opportunity cost of a car is low when the economy is producing few cars and many computers.

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Economists generally believe that production possibilities frontiers often have this bowed-out shape because some resources are better suited to the production of cars than computers (and vice versa). The production possibilities frontier can shift if resource availability or technology changes. Economic growth can be illustrated by an outward shift of the production possibilities frontier.

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Before development, the nation is poor. It must devote almost all its resources to food and enjoys few comforts. (b) Growth of inputs and technological change shift out the PPF. With economic growth, a nation moves from A to B, expanding its food consumption little compared with its increased consumption of luxuries. It can increase its consumption of both goods if it desires.

Externalities
Economics studies two forms of externalities. An externality is something that, while it does not monetarily affect the producer of a good, does influence the standard of living of society as a whole. A positive externality is something that benefits society, but in such a way that the producer cannot fully profit from the gains made Examples: Environmental clean-up and research. A cleaner environment certainly benefits society, but does not increase profits for the company responsible for it. Likewise, research and new technological developments create gains on which the company responsible for them cannot fully capitalize.

A negative externality is something that costs the producer nothing, but is costly to society in general. Negative externalities, unfortunately, are much more common. Examples: Pollution A company that pollutes loses no money in doing so, but society must pay heavily to take care of the problem pollution caused.

The problem this creates is that companies do not fully measure the economic costs of their actions. They do not have to subtract these costs from their revenues, which means that profits inaccurately portray the company's actions as positive. This can lead to inefficiency in the allocation of resources. Because neither the market nor private individuals can be counted on to prevent this inefficiency in the economy, the government must intervene. The government's basic goal is to force companies to internalize externality costs. This means that if a company's pollution creates economic costs (for example, the medical bill of a patient who gets sick from pollution), then the government will force the company to pay that cost. In this way, the company can more accurately compare revenues and expenses and decide whether production is indeed profitable.

To achieve its goal, the government can use one of several types of regulation. It can create pollution limits, tax companies for polluting, or hand out tradable pollution permits.