A Real-Number Production Possibilities Frontier

One of my roommates, an engineer, complained about his economics course as follows: "I understand the diagrams just fine, but in my engineering classes, after they show the diagram, they give me the formula and numbers, so I can apply the diagram. But in economics, I never get the numbers." And I have heard other students (engineering students mostly) complain about this since.

There are reasons for this vagueness. The most important reason is that the numbers and the exact formula may depend on the time and place and circumstances, as, for example, the Production Possibilities Frontier can change over time as new techniques are discovered or resources are used up. As a rule, statistical methods will have to be used to estimate them. Nevertheless, it's a good point, and we will try to give some real number examples from time to time in this text. Caution: these examples are estimates and are offered mainly as illustrations. Better estimates would require more complex methods.

Here is an estimated real-number Production Possibility Frontier for the United States in 1996. It is based on the consensus forecast for economic growth in 1996 and on data for about 40 previous years. The two goods are investment (on the vertical axis) and consumption (on the horizontal axis). Both are measured in billions of dollars adjusted for inflation by a method known as a "chain index" so that the dollars purchase roughly as much as they did in 1992.

Figure 3

If you look closely, you will see that the Production Possibility Frontier in Figure 3 is not exactly a straight line, but has a very slight curvature.

Opportunity Cost