The Production possibility frontier
1. To see how this tool helps us to think about scarcity and the problem of what to produce, we consider a hypothetical economy in which there are two types of good, food and films. There are four workers in the economy. A worker can produce in either the food industry or the film industry.
2. Table 2-1 shows how much of each good can be produced per week. The answer depends on how the workers are allocated between the two industries.
Table 2-1 Production possibilities in the hypotetical economy Employment Output of Employment Output of in food food in films films 4 25 0 0 3 22 1 9 2 17 2 17 1 10 3 24 0 0 4 30
In each industry, the more workers there are, the greater is the total output of the good produced. We have assumed that production in each industry satisfies the law of diminishing returns. Each additional worker adds less to total industry output than the previous additional worker added. . For example, consider the film industry.
Beginning from the position of no workers and no output, the first worker employed increases output by 9 units per week. Adding a second worker raises film output only by 8 units per week, taking total film output to 17 units per week.
Adding a third worker increases output by only 7 units per week, and the addition of yet more workers leads to evn smaller increases in film output.
3. What lies behind the law of dimishing returns? We have implicitly assumed that workers in the film industry have at thir disposal a fixed total amount of cameras, studios, and other equipment. The first worker has sole use of all these facilities. When a second worker is added, the two workers must share these facilities. The addition of further workers reduces equipment per worker to even lower levels. Thus, output per workers in the film industry falls as employment in the film industry rises. One worker produces 9 units per week, two workers average only 8.5 units per week, and three workers average only 8 units per week. A similar story applies in the food industry. The fixed total supply of available land, water, and fertilizer must be shared between the total workforce. The first worker, using all these resources, produces 10 units of food per week, but output per person falls to 8.5 units per week when two workers share these resources, and is only 7 units per week when three workers share them. Both industries exhibit diminishing returns as additional workers are added.
4. Table 2-1 shows the possible combinations of food and film output that can be produced in the hypotetical economy if all workers are employed. At one extreme, with all workers employed in food production, the economy can produce 25 units of food and 0 units of film. At the other extreme, with all workers employed in the film industry, the economy can produce 30 units of films but no food. By transferring workers from one industry to the other, the economy can produce more of one good, but only at the expense of producing less of the other good. We say that there is a trade-off between food production and film production. In moving down the rows of Table 2-1, society is trading off food for films, giving up units of food production to obtain additional units of film output.