Alternatives in Production: Diagram

As the table shows, increasing the production of machines causes the upper limit on food to decline, slowly at first, and more and more rapidly as the quantity of machines increases. This relationship is shown as a diagram in Figure 1. In the diagram, the quantity of machines is measured from left to right, and the quantity of food is measured from bottom to top. We see how the production of food drops off more and more steeply as more and more machines are produced.

Figure 1: The Production Possibility Frontier

This curve is called the "Production Possibility Frontier." It is a frontier because it shows the upper or outer limits of production of the two goods. Economia can produce any amount of food and machinery that lies on the curve, or under it. They could produce, let us say, 400 units of machines with 600 food. To do that would be inefficient -- Economia would not be using the available resources to the best advantage,

On the other hand, if they produce 500 of machines and 750 food, that is efficient, in that they cannot increase the production of one good without either (a) cutting back on the other good, or (b) finding more resources. Economia would then be making full use of all the resources it has. All of the points on the Production Possibility Frontier correspond to efficient combinations of food and machines, while any point underneath the Production Possibility Frontier corresponds to an inefficient combination of food and machines. Therefore, at a minimum, our economic planners will want to get onto the Production Possibility Frontier.

Put another way, the Production Possibility Frontier describes the set of all opportunities for production of machines and food that are available to us -- the opportunity set of Economian society. But it is a large set. Even if we consider only the combinations of food and machinery that are on the Production Possibility Frontier, we find that there are infinitely many of them! Therefore, society has to choose -- which point on the Production Possibility Frontier is best? This is the first of our Four Fundamental Questions: What will be produced?

How are our planners to make that decision? Since this is an economics book, we shall assume that they use some sort of cost-benefit analysis! But how? to answer that question, we shall have to take cost-benefit analysis one step at a time: first costs, then benefits, then put them together.