The Production Possibility Frontier

Written By Unknown on Thursday 20 June 2013 | 13:13

Countries cannot have unlimited amounts of all goods. They are limited by the resources and the technologies available to them. The need to choose among limited opportunities is dramatized during wartime. In debating whether the United States should go to war in Iraq, people wanted to know how much the war would cost. Would the war effort divert$50 billion or$100 billion, or even more from the civilian economy to occupying and rebuilding Iraq? And, as numbers begin to climb, people naturally asked, why are we policing Baghdad rather than New York or repairing the electrical system in the Middle East rather than in the U.S. Midwest? The more output that goes for military tasks the less there is available for civilian consumption and investment. 

Let us consider an economy which produces only two economic goods-Guns and Butter. The guns of course, represent the military spending and, the butter stands for civilian spending. Suppose that our economy decides to throw all its energy into producing the civilian good-‘butter’. There is a maximum amount of butter that can be produced per year. The maximum depends on the quantity and quality of the economy’s resources and the productive efficiency with which they are used. Suppose 5 million pounds of butter is the maximum amount that can be produced with the existing technology and resources. 

At the other extreme, imagine that all resources are devoted to the production of guns. Again, because of resource limitations, the economy can produce only a limited quantity of guns. For example, let us assume that the economy can produce 15,000 guns of certain kind, if no butter is produced. 

These are two extremes possibility there are many others. We have some guns and some amount of butter. If we want more guns we need to give up more and more amounts of butter. 

A schedule of possibilities is given below. Combination F shows the extreme, where all butter and no guns are produced. While A depicts the opposite extreme, where all resources go into guns. In between these two extreme possibilities there are E, D, C, and B where increasing amounts of butter are given up in return for more guns. 

We can represent our economy’s production possibilities more vividly in the following diagram.

This frontier shows the schedule along which society can choose to substitute guns for butter. It assumes a given state of technology and a given quantity of inputs. Points outside the frontier, such as point I are not feasible or unattainable. Any point inside the curve, such as U, indicates that the economy has not attained productive efficiency, as is the case, for instance, when unemployment is high during severe business cycles. 

The production possibility frontier shows the maximum amounts of production that can be obtained by an economy, given its technological knowledge and quantity of inputs available. The production possibility frontier represents the menu of goods and services available to society. 

Uses of the production possibility curve: 

The production possibility curve is of much importance in explaining some of the truths of the basic facts of human life. The problems of unemployment, of technological progress, of economic growth, and of economic efficiency, can be easily understood and solved with the help of production possibility curve. 

1. Unemployment: 

If we were to relax the assumption of full employment of resources, we can know the level of unemployment of resources in the economy. Such a situation is depicted in the following diagram. Where the curve P’P’ depicts substantial unemployment in the economy. 

It implies either idle resources or inefficient use of resources within the economy. The economy can attain the full employment level P”P” by utilizing its resources fully and efficiently. At the level of full employment level, the economy can have more of capital goods at point B, or more of consumer goods at point C or more of both the goods at point D. 

2. Technological progress: 

By retaining the assumption of given and constant production techniques, it can be shown with the help of the production possibility curve the increase in the production of both the goods than before. Suppose the economy is producing certain quantities of consumer goods and capital goods as represented by the production possibility curve P’P’ in the following diagram. 

Given the supplies of factors, if the productive efficiency of the economy improves by technological progress, its production possibility curve will shift outwards to P”P”. It will lead to the production of more quantities of both consumer and capital goods as shown by the movement from the movement from point A on P’P’ curve to point C on P”P” curve to point C on P”P” curve. 

3. Economic growth: 

By relaxing the assumption of the fixed supply of resources, and of short period, the production possibility curve helps us in explaining how an economy grows. The supplies of resources like land, labour, capital and entrepreneurial ability are fixed only in the short run. Development being a continuous and long-run process, these resources change over time and shift the production possibility curve outward as shown in the diagram. 

If the economy is stagnant at a point S, economic growth will shift to point A in the diagram 1.3, on the production possibility curve P’P’ and a further increase in the resources may shift the production possibility curve towards the right to P”P” and the economy will produce at point C. When there is economic growth at point C, the economy will have larger quantities of both consumer and capital goods than before. 

4. Economic efficiency: 

The production possibility curve is also used to explain what Prof. Dorfman calls the “three efficiencies”. 
  1. Efficient selection of the goods to be produced. 
  2. Efficient allocation of resources in the production of these goods and efficient choice of methods of production. 
  3. Efficient allotment of the goods produced among consumers. 
These are, in fact, the central problems of an economy, which are related to what prof. Samuelson calls,” what, how and for whom” to produce. 

Lastly, the production possibility curve tells us about the basic fact of human life, that the resources available to man-kind in terms of factors, goods, money or time are scarce in relation to wants, and the solution lies in economizing these resources. As aptly put by Prof. Samuelson,”Economic scarcity refers to the basic fact of life that there exists only a finite amount of human and non-human resources, which the best technical knowledge is capable of using to produce only a limited maximum amount of each and every good, as shown by the production possibility frontier.

Notes provided by Prof. Sujatha Devi B (St. Philomina's College)
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