Notes

Production Possibilities
Your class decides to sponsor a community breakfast as a fundraiser. Can you make more money by serving eggs or pancakes? Should you offer both? To decide, you’ll have to look at the cost of ingredients, the number of workers you have, and the size of the kitchen. Also, does it take more time to scramble eggs or to flip pancakes? What you decide will affect how much money you raise.

Nations face similar decisions about what to produce. For nations, however, the consequences of these decisions can be far more serious.

To decide what and how much to produce, economists use a tool known as a production possibilities curve. You will see how an imaginary country uses this tool to decide between producing two very different products: shoes and watermelons. Economists often use graphs to analyze the choices and trade-offs that people make. Why? Because graphs help us see how one value relates to another value. A production possibilities curve is a graph that shows alternative ways to use an economy’s productive resources. The axes of the graph can show categories of goods and services, such as farm goods and factory goods or capital goods and consumer goods. The axes can also display any pair of specific goods or services, such as hats on one axis and shoes on the other.

Drawing a Production Possibilities Curve To draw a production possibilities curve, an economist begins by deciding which goods or services to examine. In this example, we will look at a fictional country called Capeland. Government economists in Capeland must decide whether to use the nation’s scarce resources to manufacture shoes or to grow watermelons. The economists determine that, if Capeland used all of its resources to produce only shoes, it could produce 15 million pairs of shoes. At the other extreme, if Capeland used all of its resources to produce only watermelons, it could produce 21 million tons of watermelons. The Capeland economists use this information to create a production possibilities curve (Figure 1.3). The vertical axis of the graph represents how many millions of pairs of shoes Capeland’s factories can produce. The horizontal axis shows how many millions of tons of watermelons Capeland’s farmers can grow. At point a, Capeland is producing 15 million pairs of shoes but no watermelons. At point c, Capeland is producing 21 million tons of watermelons but no shoes.

There is a third, more likely alternative. The citizens of Capeland can use their resources to produce both shoes and watermelons. The table shows four different ways that Capelanders could use their resources to produce both shoes and watermelons. Using the made-up data from the table, we can plot points on the graph.This line, called the production possibilities frontier, shows combinations of the production of both shoes and watermelons. Any spot on that line represents a point at which Capeland is using all of its resources to produce a maximum combination of those two products.

Trade-Offs Along the Production Possibilities Frontier Each point on the production possibilities frontier reflects a trade-off. Near the top of the curve, factories produce more shoes, but farms grow fewer watermelons. Farther down the curve, farms grow more watermelons, but factories make fewer pairs of shoes.

These trade-offs are necessary because factors of production are scarce. Using land, labor, and capital to make one product means that fewer resources are left to make something else.