The Production Possibilities Frontier Panel

The Production Possibilities Frontier Panel (a) shows the production opportunities available to Frank the farmer and Rose the rancher. Panel (b) shows the combinations of meat and potatoes that Frank can produce. Panel (c) shows the combinations of meat and potatoes that Rose can produce. Both production possibilities frontiers are derived assuming that Frank and Rose each work 8 hours per day. If there is no trade, each person’s production possibilities frontier is also his or her consumption possibilities frontier.

Panel (b) of Figure 1 illustrates the amounts of meat and potatoes that Frank can produce. If Frank devotes all 8 hours of his time to potatoes, he produces 32 ounces of potatoes (measured on the horizontal axis) and no meat. If he devotes all his time to meat, he produces 8 ounces of meat (measured on the vertical axis) and no potatoes. If Frank divides his time equally between the two activities, spending 4 hours on each, he produces 16 ounces of potatoes and 4 ounces of meat. The figure shows these three possible outcomes and all others in between.

 

 

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This graph is Frank’s production possibilities frontier. As we discussed in Chapter 2, a production possibilities frontier shows the various mixes of output that an economy can produce. It illustrates one of the Ten Principles of Economics in Chapter 1: People face trade-offs. Here Frank faces a trade-off between producing meat and producing potatoes.

 

 

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PRINTED BY: ma[email protected] Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher’s prior permission. Violators will be prosecuted.

You may recall that the production possibilities frontier in Chapter 2 was drawn bowed out. In that case, the rate at which society could trade one good for the other depended on the amounts that were being produced. Here, however, Frank’s technology for producing meat and potatoes (as summarized in Figure 1) allows him to switch between the two goods at a constant rate. Whenever Frank spends 1 hour less producing meat and 1 hour more producing potatoes, he reduces his output of meat by 1 ounce and raises his output of potatoes by 4 ounces—and this is true regardless of how much he is already producing. As a result, the production possibilities frontier is a straight line.

Panel (c) of Figure 1 shows the production possibilities frontier for Rose. If Rose devotes all 8 hours of her time to potatoes, she produces 48 ounces of potatoes and no meat. If she devotes all her time to meat, she produces 24 ounces of meat and no potatoes. If Rose divides her time equally, spending 4 hours on each activity, she produces 24 ounces of potatoes and 12 ounces of meat. Once again, the production possibilities frontier shows all the possible outcomes.

If Frank and Rose choose to be self-sufficient rather than trade with each other, then each consumes exactly what he or she produces. In this case, the production possibilities frontier is also the consumption possibilities frontier. That is, without trade, Figure 1 shows the possible combinations of meat and potatoes that Frank and Rose can each produce and then consume.

These production possibilities frontiers are useful in showing the trade-offs that Frank and Rose face, but they do not tell us what Frank and Rose will actually choose to do. To determine their choices, we need to know the tastes of Frank and Rose. Let’s suppose they choose the combinations identified by points A and B in Figure 1. Based on his production opportunities and food preferences, Frank decides to produce and consume 16 ounces of potatoes and 4 ounces of meat, while Rose decides to produce and consume 24 ounces of potatoes and 12 ounces of meat.

3-1b Specialization and Trade After several years of eating combination B, Rose gets an idea and goes to talk to Frank:

ROSE: Frank, my friend, have I got a deal for you! I know how to improve life for both of us. I think you should stop producing meat altogether and devote all your time to growing potatoes. According to my calculations, if you work 8 hours a day growing potatoes, you’ll produce 32 ounces of potatoes. If you give me 15 of those 32 ounces, I’ll give you 5 ounces of meat in return. In the end, you’ll get to eat 17 ounces of potatoes and 5 ounces of meat every day, instead of the 16 ounces of potatoes and 4 ounces of meat you now get. If you go along with my plan, you’ll have more of both foods. [To illustrate her point, Rose shows Frank panel (a) of Figure 2.]

FRANK: (sounding skeptical) That seems like a good deal for me. But I don’t understand why you are offering it. If the deal is so good for me, it can’t be good for you too.

ROSE: Oh, but it is! Suppose I spend 6 hours a day raising cattle and 2 hours growing potatoes. Then I can produce 18 ounces of meat and 12 ounces of potatoes. After I give you 5 ounces of my meat in exchange for 15 ounces of your potatoes, I’ll end up with 13 ounces of meat and 27 ounces of potatoes, instead of the 12 ounces of meat and 24 ounces of potatoes that I now get. So I will also consume more of both foods than I do now. [She points out panel (b) of Figure 2.]


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