Analyzing Supply and Demand

The production possibilities curve displays the different combinations of two goods or services that can be produced in a full production economy with full employment, with the availability of fixed resources and fixed technology. It is a production frontier due to its display of the limit of attainable outputs (Rittenberg & Tregarthen, 2008, p. 52).
The law of increasing opportunity costs states that as production of goods increase, the opportunity cost of producing another item also increases. Because many resources are not adaptable to other uses, one resource may be helpful in producing butter, but not be useable in the production of guns. According to the law of demand, with an increase in price comes a decrease in the quantity demanded as long as there are no other changes (Rittenberg & Tregarthen, 2008, p. 59).
In analyzing supply and demand, it is also important to analyze how the changes will impact equilibrium price and equilibrium quantity in a competitive market. Analyzing whether supply and demand increases, decreases or remains constant can help determine whether market equilibrium price and quantity will increase, decrease or be indeterminate (Gwartney, Stroup, & Studenmund, 2015). Problem A
Type of Production Production Alternative A Production Alternative B Production Alternative C Production Alternative D Production Alternative E
Butter 0 1 2 3 4
Guns 15 14 12 9 0

The specific assumptions that underlie the production possibilities curve are two goods, fixed technology, full employment, and fixed resources. In this instance, guns (capital) and butter (consumer), represent a combination of two goods that the economy can produce using all of the technology and resources available. Assuming there is full employment, and fixed resources and technology, this sample shows a full production economy.