5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

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 the cov-

erage of macroeconomics, but for the time being, the frontier looks like Figure 5.2.

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 pro-

duction and moved into pastry production.

Perhaps some of the capital (i.e., pans) in the bakery are better suited to pizza crust pro-

duction than pastry production. Certainly raw materials like chocolate and frosting are not

very useful for pizza crust production, but are extremely valuable to the pastry production.

Production Possibility Curve

0

2

4

6

8

10

12

0123456

Pastries

Crusts

Figure 5.2

The opportunity cost of each good is also apparent in the production possibility curve

itself.

KEY IDEA

KEY IDEA

TIP

• 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,^1 ⁄ 2 in our case, measures the opportunity cost of the good on
  theyaxis.

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