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Use a production possibilities diagram for cars and other goods to illustrate scarcity

Use a production possibilities diagram for cars and other goods to illustrate scarcity

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A production possibility frontier shows all the possible combinations of two goods that can be produced using available resources and technology. Resources are scarce and therefore people have to make choices, which leads to opportunity cost (the next best alternative that is given up when a choice is made).

On the below graph, the PPF diagram shows an economy that produces cars and other goods. Suppose initially the economy operates at point A, where it produces C1 amount of cars and O1 amount of other goods. If the economy moves to point B, it's car production will increase to C2 but the amount of the other goods produced will be decreased to O2. This happens because resources are scarce. So, to produce more of cars the economy needs to give up some of the other goods. This is also known as the opportunity cost of production.

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