Production Possibilities Curve And Choice

Choice is illustrated by the available combinations along the production possibilities curve. For instance, in Zanadu, society must choose which combination of laptops and mobile phones to produce to ensure the maximum satisfaction to the citizens of Zanadu.

The production possibilities curve provides information on technical efficiency – that is, the maximum number of goods and services that can be produced with the given resources. It does not tell us which of these possible combinations present allocative efficiency – that is, the optimal (best) combination of goods and services desired by consumers.

Allocative efficiency is achieved when the economy is doing the best possible job of satisfying unlimited wants and needs with limited resources. To achieve this however, the market must first achieve technical efficiency. And this technical efficiency must be useful or valued by people.

For example, an industry might achieve technical efficiency for the production of 10cm pieces of yellow cotton string, but if nobody in the market actually wants these, they will pile up in a room somewhere, and allocative efficiency has not been achieved.

Allocative efficiency occurs when an economy provides the greatest amount of consumer satisfaction that is possible given the available resources. So markets have a role to play in determining not only the point of technical efficiency for the production of a good or service, but also the point of allocative efficiency.

The production possibilities curve provides information on technical efficiency – that is, the maximum number of goods and services that can be produced with the given resources. It does not tell us which of these possible combinations present allocative efficiency – that is, the optimal (best) combination of goods and services desired by consumers.

Which combination (A, B, C, D, E or F) consumers desire is an important issue in economics, and something we will return to later in the course.

What is the difference between points D and C? If we examine the table and the diagram, we see that at point D, 2 000 laptops and 24 000 mobile phones are produced, while at point C, 3 000 laptops and 18 000 mobile phones are produced. Because more laptops are produced, fewer mobile phones are produced. The people of Zanadu are facing a trade-off – to have more laptops they must give up some mobile phones. As they move from point D to point C, they are allocating more resources to the production of laptops and fewer to the production of mobile phones.

From this one can also conclude that the question of what to produce is in fact a decision about how resources should be allocated among their competing uses. Competing uses suggests that the same resources could be used to produce different things. A decision to produce at a point such as D indicates that a decision has been made to allocate resources in such a way that this specific combination is produced.