Investment and economic growth
Allocating resources to capital goods, is referred to as investment. If an economy chooses to produce more capital goods than consumer goods, at point A in the diagram, then it will grow by more than if it allocated more resources to consumer goods, at point B.
To
achieve long run growth the economy must use more of its capital resources to
produce capital rather than consumer goods. As a result, standards of living
are reduced in the short-run,
as resources are diverted away from private consumption. However, the increased
investment in capital goods enables more output of consumer goods to be
produced in the long run. This means that standards of living can increase in
the future by more than they would have if the economy had not made such as
short-term sacrifice. Hence economies face a choice between high levels of
consumption in the short run and the long run.
An economy can grow because of an increase in productivity in one sector of the economy - called asymmetric growth. For example, an improvement in technology applied to industry Y, such as motor vehicles, but not to X, such as food production, is illustrated by a shift of the PPF from the Y-axis only.
Factor mobility
If workers, or other resources, are moved from one sector to another, then the position of the PPF pivots, with an increase in the maximum output in the industry gaining the resources, and a fall in the maximum output of the industry losing resources.
