Guns And Butter Curve

The classic economic example of the production possibility curve, which demonstrates the idea of opportunity cost. In a theoretical economy with only two goods, a choice must be made between how much of each good to produce. As an economy produces more guns (military spending) it must reduce its production of butter (food), and vice versa.

In the chart, the red curve represents all possible choices of production for the economy. The black dots represent two possible choices of outputs. The point here is that every choice has an opportunity cost; you can get more of something only by giving up something else. Also notice that the curve is the limit to the production - you cannot produce outside the curve unless there is an increase in productivity.