Reading for Enrichment The Production-Possibilities Frontier

Deciding what to produce requires choices and involves opportunity costs and trade-offs for nations just as it does for individuals and busi­nesses. Consider this example. According to the International Monetary Fund, infant mortality sta­tistics and calorie consumption per person in Latin America and the Caribbean have improved—peo­ple are healthier than they were 25 years ago. At the same time the importance of agricultural pro­duction has declined! This means that Latin Amer­icans are making different decisions about what to produce today than they were in the past.

Such decisions can be shown on a production-possi­bilities curve. Stated simply, assume that a nation produces two types of products—farm products and manufactured goods such as cars, toasters, and drills. Experts find that if all the nation's resources were used to produce farm products, 15 million bushels could be produced. But if all were devoted to manufacturing, about 30 million units could be produced in a single year. It also would be possible to produce a combination of manufactured and farm products. See the following table.

Production-Possibilities Schedule

Production Combination	Farm Products (millions of bushels)	Manufactured Products (millions of units)
1	15	0
2	14	5
3	11	15
4	5	25
5	0	30

The numbers from this table can be plotted on a graph—a production-possibilities curve.

From the schedule and curve, you can estimate that the maximum possible production of manufactured and farm products would be near point A, with 11 million bushels of farm production, and 15 million units of manufactured products. If businesses decided to increase manufactured products to 25 million units (point B), farm production would have to be reduced to 5 million bushels. This means that producing 10 million additional manufactured units (15 to 25) required the country to give up (trade off) 6 million bushels of farm products. Or, the opportu­nity cost of increasing manufactured products to 25 million units is 6 million bushels.

Economists often describe the curve as a produc­tion-possibilities frontier, because it shows the max­imum a nation could produce using all its resources. But suppose that production actually stood at 8 mil­lion bushels of farm products and 10 million units of manufactured goods (point X). Then the country had idle resources that could be used. Or suppose businesses wanted to produce 10 million bushels and 25 million manufacturing units (point Y). What would need to happen to accomplish this goal?

S ince businesses and nations produce many prod­ucts and have many choices, you might feel that production-possibilities curves have little practical value. But the truth is we often make decisions about using resources that can be better understood by plotting the options on a graph. How many pas­senger planes can be built with the resources used in one "stealth" bomber? How many elementary schools can be built for the materials used in one prison? Should farmers in your area grow wheat or carrots? Should we invest in robots or additional workers to increase production in our factory? What are other trade-offs you could analyze using a pro­duction-possibilities curve?

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