Production Possibilities Frontier (PPF): In economics, the production possibility frontier (also called "transformation curve") is a graph that depicts the opportunity cost between any two items produced. It shows the maximum obtainable amount of one commodity for any given amount of another commodity. The concept is used in macroeconomics to show the production possibilities available to a nation or economy, and also in microeconomics to show the options open to an individual firm. All points on a production possibilities curve are points of maximum efficiency: resources are allocated such that it is impossible to increase the output of one commodity without reducing the output of the other. If you reflect on this table, you will see the importance of scarcity. You can think of the production-possibilities frontier as the way economists visualize scarcity. .
2. Circular flow: An exchange is a voluntary agreement between two people, in which each gives something to the other and gets in return something that he considers of greater value. The circular flow diagram divides the economy into two sectors: one concerned with producing goods and services, and the other with consuming them. Resources are converted into goods and services by business, and in this transformed state travel back to consumers. Money flows in the opposite direction. These flows involve two markets in which exchange takes place: the resource or factor market in which business buys resources, and the goods and services market in which business sells goods. (Some economists define a "factor of production" as the service of some resource. If resources are land, labor, and capital, the factors of production are the services of land, labor, and capital. We will ignore the distinction between resources and factors of production in the discussion that follows.) Both the model of supply and demand and consumer choice with utility analysis are key elements of an understanding of an exchange economy.