THE PRODUCTION-POSSIBILITY FRONTIER

Societies cannot have everything they want. They are limited by the resources and the technology available to them. Take defense spending as an example.Countries must decide how much of their limited resources goes to their military and how much goes into other activities (such as new factories or education).Some countries, like Japan, allocate only”1 percent
of their national output to their military. The United States spends 4 percent of its national output on defense, while a fortress economy like North Ko-, rea spends up to 20 percent of its national output on the military. The more output that goes for defense, the less there is’ available for consumption and investment.

Let us dramatize this choice by considering an economy which produces only two economic goods,. guns and butter. The guns, of course, represent 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 maximal-amount of butter depends on the quantity ‘and quality of the economy’s resources and the productive efficiency

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Scarce inputs and technology imply that the production of guns and butter is limited. As we go from A to B … to F,we are transferring labor, machines, and land from the gun industry to butter and can thereby increase butter production.

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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 instead devoted to the production of guns.Again, because of resource limitations, the economy can produce only a limited quantity of guns.For this example, assume that the economy can produce 15,000 guns of a certain kind if no butter is produced.

These are two extreme possibilities. In between are many others. If we are willing to give up some butter, we can have some guns. If we are willing to give up still more butter, we can have still more guns.A schedule of possibilities is given in Table 1·1.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-at E, D, C, and B-increasing amounts of butter are given up in return for more guns.

How, you might well ask, can a nation turn butter into guns? Butter is transformed into guns not physically but by the alchemy of diverting the economy’s resources from one use to the other.We can represent our economy’s production possibilities more vividly in the diagram shown in

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This frontier shows the schedule along which society choose to substitute guns for butter, It assumes a given stat of technology and a given quantity of inputs. Points out side the frontier (such as point I) arc in feasible or unattainable. Any point inside the curve, such as l.indicates that the economy has not attained productive efficiency as is the case, for instance. when unemployment is hi during severe business cycles.

Figure 1-1. This diagram measures butter along the . horizontal axis and gun along the vertical one, (If you are unsure about the different kinds of graphs or about how to turn sa table into a graph, consult the appendix to this chapter.) We plot point F ill Figure 1·1 from the data in Table 1-1 by counting over 5 butter units to the right on the horizontal axis and going up 0 gun units on the vertical axis; similarly.E is obtained by going 4 butler units to the right and going up 5 gun units; and finally, we get A by going over 0 butter units and up 15 gun units.

If we fill in all intermediate positions with new blue-colored points representing all the different combinations of guns and butter we have the continuous blue curve Show as the production-possibility frontier, or PPF, in Figure 1-2. The production-possibility ‘frontier (or PPF’) shows the maximum amounts of production that call be obtained by an economy, given its technological knowledge and quantity of inputs available. The PPF represents the menu of goods and services available  to society,

Putting the PPF to Work
The PPF in Figure 1-2 was drawn for guns and butter , but the same analysis applies to any choice of goods. Thus the more resources the government uses to build public goods like highways. the less will be left to produce private goods like houses; the more we choose to consume of food. the less we can consume of clothing; the more society decides to consume today, the less can be its product..ion oi capital goods to turn out more consumption goods in the future.

The graphs in Figures 1-3 to 1-5 present some important applications of PPFs. Figure 1-3 shows the effect of economic growth on a country’s production possibilities. An increase in inputs. or improved technological knowledge. enables a country to produce more of all goods and services, thus shifting out the

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(a) before development. the nation is poor, It must devote almost all its resources 10 food and enjoy few comforts,(b) Growth of inputs and technological change shift out the PPF With economic growth,  nation moves from A\ to B. expanding its~ food consumption little compared with its increased consumption of luxuries, It can increase its consumption of both goods if it desires.

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(a) A poor frontier society lives from hand to mouth, with little left over Cor public goods like highways or public health. (b) A modern urbanized economy is more prosperous and chooses to spend more of its higher income on public goods and government services (roads, environmental protection, and education).

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A nation can produce either current-consumption goods (pizzas and concerts) or investment goods (pizza ovens and concert halls). (a) Three countries start out even. They have the same PPF. shown in the panel on the left, but they have different investment rates. Country 1 does not invest for the future and remains at AI (merely replacing machines). Country 2 abstains modestly from consumption and invests at A2. Country 3 sacrifices a great deal of current consumption and in~ heavily. (b) In the following years, countries that invest more heavily forge ahead. Thus thrifty Country 3 has shifted its PPF far out, while Country 1’5 PPF has not moved at all. Countries that invest heavily.have higher investment and consumption in the future.

PPF. The figure also illustrates that poor countries must devote most of their resources to food pr<r suction while rich countries can ‘afford more luxuries as productive potential increases., Figure 1-4 depicts the electorate’s choice between private goods (bought at a price) and public goods (paid for by taxes). Poor countries can afford little of public goods like public health and scientific research. But with economic growth, public goods as well as environmental quality take a larger share ofoutput.

Figure 1-5 portrays an economy’s choice between (a) current-consumption goods and (b) investment  or capital goods (machines, factories, etc.). By sacrificing current consumption and producing’ more capital goods, a nation’s economy can grow more rapidly: making possible more of both goods (consumption and capital) in the future.

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The trade-off pf time
The production·possibility frontier can also show the crucial economic notion Of trade offs. One of the most important decisions all people make is how to use their time. Pe0- ple have limited’ time available to pursue different activities. For example. as a student.)’OU might have 10 hours to. study for upcoming tests in both eco.nomics and history. If you study only history. you will get a high grade there and do poorly in economics, and vice versa. Treating the grades on the two tests as the “QUtpUt” of your studying, sketch out the PPF for grades. given your limited time’ resources. Alternatively. if the two student commodities are “grades” and “fun,” how would you draw this PPF? Where are you on this frontier Where are your lazy friends.

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