2. Production Possibilities Curve

You'll see the problem of scarcity more clearly with the aid of a simple model whose purpose is to examine the relationship between the production of goods and services and the availability and use of resources. In the analysis we make the following assumptions:

1. The quantity and quality of economic resources available for use during the year are fixed. There is a given amount of available labor, capital, natural resources, and entrepreneurial ability. This limits the extent to which our desires for goods and services can be satisfied during the year.

2. There are two broad classes of outputs we can produce with available economic resources: for example, food and clothing. We make the assumption of only two products to the analysis while showing the basic trade-offs we must consider while coping with the problem of scarcity.

3. Some inputs are better adapted to the production of one good than to the production of the other. A pickup truck can as easily be used to transport materials needed to produce clothing as to transport materials needed to produce food. However, a loom that's used to weave cloth is virtually useless in the production of food. The loom may be dismantled and its parts used in agricultural machinery, but it's much more productive when used to manufacture clothing. Similarly, some workers' skills that is better adapted to one use than another. Transferring a skilled tailor from clothing to food production will cause a greater loss in output of clothing than transferring a truck driver from delivering clothing to delivering food. The more specialized a worker, the higher the opportunity cost of transferring him or her to an area out of that specialty.

4. Technology is fixed and does not advance during the year. In general, advances in technology take more than one year to develop. In assuming fixed technology, we’re implying that the productiveness of inputs doesn't change during the year as a result of improved knowledge or technical advances.

Some resources have a comparative advantage over other resources – the ability to be better suited to the production of one good than to the production of other good.

Given available resources, their quality, and current technology, there is a limited amount of any one good that can be produced in an economy given the output of other goods.

A production possibilities curve shows the maximum possible output for one good that can be produced with available resources, given the output of the alternative good over a period.

The curve shows the options available to produce various combinations of goods and services under current technology during a year, assuming the resources are fully utilized.

A production possibility table is table that lists a choice’s opportunity costs by summarizing what alternative outputs you can achieve with your inputs. This table lists the different combinations of two products which can be produced with a specific set of resources (and with full employment and productive efficiency).

The data and ideas of production possibilities table can also be shown graphically, that is production possibilities curve.

A production possibilities curve for food and clothing shows the maximum number of garments that can be produced each year given each possible level of food production (Picture and table).