46 ❯ Step 4. Review the Knowledge You Need to Score High
We can graphically depict Table 5.1 in a production possibility curve. Each point on
the curve represents some maximum output combination of the two products. Some refer
to this curve as a production possibility frontier because it reflects the outer limit of pro-
duction. Any point outside the frontier (e.g., 4, 8) is currently unattainable, and any point
inside the frontier (e.g., 1, 2) fails to use all of the bakery’s available resources in an efficient
way. We talk more about efficiency at the end of this section.
So here you might wonder, “Why is there a limit to the production of these goods? In
other words, why doesn’t the frontier just expand to allow an unlimited amount of either?”
Over the course of time, the frontier is believed to expand. But at any given point in
time, we must confront the scarcity problem again. The resources used to produce these
goods are scarce, and thus the production frontier is going to act as a binding constraint.
The concept of economic growth is introduced in this chapter and also discussed in
Chapter 10, but for the time being, the frontier looks like Figure 5.2.Production Possibility Curve0246810120123456
PastriesCrustsFigure 5.2The opportunity cost of each good is also apparent in the production possibility curve
itself. We ignore the fact that the curve slopes downward and simply focus on its magni-
tude, or absolute value.• The slope of the curve, 2 in our case, measures the opportunity cost of the good on
the x-axis.
• The inverse of the slope, ½ in our case, measures the opportunity cost of the good on
the y-axis.Notice that with a straight line, the opportunity cost of producing more of each good
is always a constant. Is this realistic?Resource Substitutability
Suppose our bakery chef is currently producing 10 pizza crusts and zero pastries. But today
she decides that she should produce one pastry and eight crusts. In Figure 5.2, this decision
appears fairly straightforward.
What we often forget is that resources must be reallocated from pizza crust production
to pastry production. Labor, capital, and natural resources must be removed from crust
production and moved into pastry production.
Perhaps some of the capital (i.e., pans) in the bakery are better suited to pizza crust
production than pastry production. Certainly raw materials like chocolate and frosting are
not very useful for pizza crust production, but extremely valuable to the pastry production.KEY IDEATIPKEY IDEA