Introduction

After you have worked through this section of the learning unit, you should be able to:

  • describe a production possibilities curve
  • identify the assumptions use to derive a production possibilities curve

While thousands of different goods and services are produced in the real world, an important assumption of our model is that only two goods are produced. As an example to illustrate this we will use a hypothetical country, Zanadu, in which laptops and mobile phones are produced.

We further assume that the economy is using all its resources fully and efficiently to produce these two goods and that the quantity and quality of these resources are fixed.

In this model it is also possible to shift the resources from the production of one good (laptops) to the production of another good (mobile phones).

Our last assumption is that, for the time being, the technology is unchanged.

Given these assumptions, in the sections below we will construct a production possibilities table and curve which indicate the combinations of goods or services that can be produced when a country's resources are employed fully and efficiently.

We will also use this production possibilities curve to demonstrate concepts such as:

  • scarcity
  • choice
  • inefficiency
  • efficiency and
  • opportunity cost.

as well as other key economic issues such as growth and the importance of investment.

Activity

Do the following activity to see if you understand the assumptions:

You are the President of Paradiso and have given instructions to your engineers to provide economists in the country with information on the production of guns and food in Paradiso so that they can construct a production possibilities curve for Paradiso.

You receive the following information from the engineers:

Resources used Tons of food Number of guns
20% 400 0,1 million
40% 430 0,9 million
60% 460 1,9 million
80% 500 2,6 million
100% 550 3,0 million

What would your opinion as an economist be of the data provided by the engineers?



Both statements a and c are correct.

It is indeed the case that the only useful information is that if Paradiso uses all its resources (100%), then it will be able to produce 400 tons of food and three million guns. This provides you with one point on the production possibilities curve. You are not interested to know what this combination is at 20% or 40% but at a 100%.   The engineers clearly misunderstood their brief.

Think again.  To construct a production possibilities curve, you need to know the different combinations of food and guns that can be produced when a country’s resources are employed fully and efficiently.

Redo the question.

Both statements a and c are correct.

The engineers clearly misunderstood their brief.  The only useful information they provided is that if Paradiso uses all its resources (100%), then it will be able to produce 400 tons of food and three million guns. This provides you with one point on the production possibilities curve. You are not interested to know what this combination is at 20% or 40% but at a 100%.