c


 c 
  

 

  
 
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"%$

= The quantity of public sector goods produced is measured along the

horizontal axis.
= The quantity of private sector goods is measured along the vertical
axis.
= Any point on the diagram indicates some amount of each kind of
good produced.
= The production-possibility boundary separates the attainable
combinations, such as °, , and
, from unattainable combinations,
such as .
= Êoints ° and represent efficient uses of society¶s resources.
= Êoint
represents either an inefficient use of resources or a failure
to use all the resources that are available.
 
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"%$&'(

= The boundary is negatively sloped because in a fully employed

economy more of one good can be produced only if resources are
freed by producing less of other goods.
= Moving from point ° Œ ith coordinates
0 and 0) to point Πith
coordinates
 and ) implies producing an additional amount of
public sector goods, indicated by Œu in the figure
= The opportunity cost of this increase in G is a reduction in private
sector goods by the amount indicated by Œc.
 )*+++,-*
*!!"#$"%$

= |conomic gro th shifts the boundary out ards.

= Some combinations of goods that ere previously unattainable
become attainable.
.*#%+#-+,%
/

= The red line sho s the flo s of goods and services hile the blue
line sho s the payments made to purchase these.
= Factor services flo from individuals ho o n the factors
Œincluding their o n labour) through factor markets to firms ho
use them to make goods and services Œred arro ).
= The goods and services then flo through goods markets to those
ho consume them Œred arro ).
= Money payments flo through factor markets from firms to
individuals Œblue arro ).
= When individuals spend this income buying goods and services,
money flo s through goods markets back to producers Œblue
arro ).
 %"# +0/1
"!#%2%%

= The first columns sho that, orking full time on his o n, Jacob
can produce either 100 pounds of potatoes
40 s eaters per
year, hereas Maria can produce 400 pounds of potatoes
10
s eaters.
= Thus Maria has an absolute advantage in producing potatoes
and Jacob has an absolute advantage in producing s eaters.
= The second columns sho the outputs if they both spend ¦°
their time producing each commodity.
= The third columns sho the results hen Jacob specializes in
s eaters, producing 40 of them, and Maria specializes in
potatoes, producing 400 pounds.
= Êotato production rises from 250 to 400, hile s eater
production goes from 25 to 40.
 %"# +0/1c,%%2%2%%

= The first columns in the table sho that Maria is more productive than
Jacob in both s eaters and potatoes.
= Compared ith Jacob, Maria is 400 per cent more efficient at
producing potatoes and 20 per cent more efficient at producing
s eaters.
= The second columns give the outputs hen Jacob and Maria each
divide their time equally bet een the t o products.
= m
 




° ¦



 





¦







 ¦°

 °
°

° ¦ 




 
°

° °



° ¦
 




 °  
= The third column gives an example in hich Jacob specializes fully in
s eater production and Maria spends 25 per cent of her time on
s eaters and 75 per cent on potatoes.
= Total production of potatoes rises from 250 to 300, hile total
production of s eaters goes from 44 to 52.
 %"#! 3 +0/1c,%%2
%2%%&'(

  This example is only an illustration. The principles can be

generalized in the follo ing ay.
= Absolute efficiencies are not necessary for there to be
gains from specialization.
= Gains from specialization occur henever there are

 
 in the margin of advantage one producer
enjoys over another in various lines of production.
  Total production can al ays be increased hen each producer
becomes more specialized in the production of the commodity in
hich it has a comparative advantage.