Production possibilities is all about what is attainable and non-attainable for us at any particular point in time.
National income is a function of all the goods and services produced in the economy in any given year or Gross Domestic Product (GDP). The more we produce, the more people are employed, and the more tax is collected (the welfare burden also decreases!) so it means more money in the budget to satisfy our collective needs and wants (defence, health, roads, law enforcement etc)
The production possibility frontier is a simple representation of the concepts outlined so far. It assumes there are only two types of goods in the economy, consumer or capital:
We can choose to produce any combination of consumer or capital goods with the given level of resources we have access to. At Point A on the curve our resources are underemployed, that is we could do better with what we’ve got!
Whereas, at Point B, on the curve or frontier, our resources are fully employed, we are efficient. (it may not be socially desirable, but it is an efficient use of resources.)
Point C is a combination of G & S with a concentration on capital goods but few consumer goods. Point D is an economy favouring consumer satisfaction now over future production.
Point E is not yet possible. It may be in the future, perhaps if technology improves, new untapped natural resources are discovered, or our population grows through skilled immigration or demand for our exports accelerates etc.,
As a nation and as individuals, we choose combinations of goods and service that maximize satisfaction, but we can’t have it all, choosing one thing means forgoing the possibility of another.
However, if we can shift the curve out to the right and make the economy (or our income and wealth) bigger, we have the new possibility of satisfying more wants and needs than ever before.
Shifting the production possibility frontier out to the right happens when the economy grows and provides the opportunity for a more satisfactory answer to the economic problem. In other words, the ‘economic pie’ gets bigger.
The constraints we faced previously have been relaxed. We have more choices.