The Production Possibilities Frontier/Graph
Graphing a "Trade-Off"
Scarcity necessitates choice. More of one thing means less of something else.
The opportunity cost of using scarce resources for one thing instead of something else is
often represented in graphical form as a production possibilities frontier.
The opportunity cost of producing (or consuming) one good is how much of the
alternative good must be sacrificed. It is possible to compute a ratio of goods given up to
goods gained. This ratio is sometimes called the per-unit opportunity cost. This would
tell us us how much of a good is sacrificed in order to gain one additional unit of an
alternative good. The formula for calculating per-unit opportunity cost (PUOC) is given
below:
Per-Unit Opportunity Cost = Number of Goods Given Up
Number of Goods Gained
In other words, this expresses the ratio for one unit in terms of the other sacrificed good.
If I give up 1 bar of ice cream to get 1 popsicle, my PUOC = 1/1.
But…if I exchange 1 bar of ice cream and get 2 popsicles, the ratio or PUOC = 1/2.
Sometimes the ratio is constant: The exchange of one good for another always is the
same. The graph of a constant PUOC would look something like:
:
The graph of an increasing opportunity cost would have a shape or shapes like:
Part A: Use the following production possibility curves and the above formula for PUOC to answer the
questions 1 through 4 for each curve. (Note that production possibility curve 3 is not realistic, but it serves
to support a “what if” thought exercise.
Production Possibility Frontier 1
Good B
12
10
8
6
4
2
0
1
2
3
4
5
6
Good A
If this economy is presently producing 12 units of Good B and 0 units of Good A:
1. The per-unit opportunity cost of increasing production of Good A from 0 units to 1 unit is the loss of
_______ unit(s) of Good B.
2. The per-unit opportunity cost of increasing production of Good A from 1 unit to 2 units is the loss of
_______ unit(s) of Good B.
3. The per-unit opportunity cost of increasing production of Good A from 2 units to 3 units is the loss of
_______ unit(s) of Good B.
4. This is an example of (constant / increasing / decreasing / zero) per-unit opportunity cost for Good A.
Production Possibility Frontier 2
Good B
12
11
10
8
6
4
2
0
1
2
3
Good A
If this economy is presently producing 12 units of Good B and 0 units of Good A:
1. The per-unit opportunity cost of increasing production of Good A from 0 units to 1 unit is the loss of _______
unit(s) of Good B.
2. The per-unit opportunity cost of increasing production of Good A from 1 unit to 2 units is the loss of _______ unit(s)
of Good B.
3. The per-unit opportunity cost of increasing production of Good A from 2 units to 3 units is the loss of _______
unit(s) of Good B.
4. This is an example of (constant / increasing / decreasing / zero) per-unit opportunity cost for Good A.
I.
Capital Goods
C
B
x
y
A
A’
Assume B, B’ is the original PPF curve:
B’
D’
C’
Consumer Goods
1. Suppose massive new sources of oil and coal are found within the economy and there are major
technological innovations in both sectors of the economy. Which curve in the diagram would represent the
new production possibility curve? (Indicate the curve you choose with two letters.) __________
2. Suppose that a new government comes into power that forbids the use of automated machinery and
modern production techniques in all industries. Which curve in the diagram would represent the new
production possibility curve? (Indicate the curve you choose with two letters.) __________
3. Suppose there is a major technological breakthrough in the consumer goods industry, and the new
technology is widely adopted. Which curve in the diagram would represent the new production
possibilities curve? (Indicate the curve you choose with two letters.) _________
4. If BB’ represents a country’s current production possibilities frontier, what can you say about a point
like x? (Write a brief statement.)
5. If BB’ represents a country’s current production possibility frontier, what can you say about a point like
y? (Write a brief statement.)
II. The graph below represents the famous Guns vs Butter Production Possibilities Graph. 1) Write
an explanation of what this graph means overall. 2) How can Point A represent 1929-39, the Great
Depression? 3) What point(s) could be 1942-45? 4) Why is Point X not possible? What would shift
the whole curve outward?
One additional source of an explanation is:
http://en.wikibooks.org/wiki/Principles_of_Economics/Production_Possibilities