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Dave Anderson: Hi, I'm Dave Anderson. I'd like to tell you about the production possibilities curve that I'm standing on. The production possibilities curve or frontier models the possibilities for what an economy can produce using its available resources efficiently.

Suppose an economy uses its resources to make wheat and honey. This curve shows all the possible combinations of these two goods the economy can produce. If it uses all of its resources to make honey, it can make 100 pounds of honey per day. If it uses all of its resources to make wheat, it can make 150 bushels per day, or the economy can make any of these combinations of wheat and honey.

Now I'm down here on the curve to show you a few things. Points above the curve are not feasible in the current economy. For example, the economy lacks the resources to make 40 pounds of honey and 170 bushels of wheat.

To be efficient in production, the economy should make a combination that is on the curve like anywhere along here such as 60 pounds of honey and 130 bushels of wheat. Points below the curve are feasible but inefficient. For example, the economy could make 35 pounds of honey and 110 bushels of wheat, as represented by this point. But with its available resources, it could make more honey or more wheat or more of both.

To understand the shape of the curve, we need to think about the specialization of resources. We have some resources that are specialized for making honey and others that are specialized for growing wheat. Some equipment is better for producing honey than wheat. Land can be better for honey or wheat production depending on the soil, climate, elevation, and topography, and some workers are better for producing honey or wheat. Now let's talk about the slope of this curve.

Recall that slope is rise over run. And when the run is an increase in honey production by 1 pound, the rise is the change in wheat production, which, in this case, is negative 0.5 bushels. We use the term opportunity cost to describe what has given up to get something.

The slope of this production possibilities curve indicates the opportunity cost of making more honey. When the slope is negative 1/2, that means that we lose one half bushel of wheat for another pound of honey. So the opportunity cost of that honey is one half bushel of wheat.

But why does the opportunity cost increase as we produce more and more honey? Suppose we begin here producing nothing but wheat, and we decide to start producing honey. Keep in mind that the specialization of resources-- the first honey will be made using resources that are specialized for the production of honey and not very useful for making wheat. So the first pounds of honey don't cause the loss of much wheat.

As we make more honey, the opportunity cost rises because we have to use more and more resources that are specialized for making wheat. By the time we get to the last possible pound of honey, we are using resources that are great at making wheat and not so great at making honey. So we have a very large opportunity cost in terms of lost wheat production.

Let's look at a special case in which the production possibilities curve is a straight line because the resources used to make the two goods are not specialized. For example, suppose the two goods are oats and wheat, and these goods are produced with the same equipment, land, and workers. If an acre will produce 60 bushels of oats or 70 bushels of wheat, then with 100 acres, an economy could produce 6,000 bushels of oats or 7,000 bushels of wheat or any of these combinations in between.

Each acre devoted to oats has the opportunity cost of 70 bushels of wheat. The slope doesn't change because we've no specialization of resources. There is no change in the trade off between oats and wheat.

When resources are specialized, we describe the shape of the production possibilities curve as concave to the origin or owed out. If an economy gains resources, such as fertile land, or new technology allows it to make better use of its existing resources, then the production possibilities curve shifts outward. If the resources or technology is useful for the production of both goods, the whole curve shifts out. If wheat seeds were modified to produce bigger plants, then the curve would pivot out like this. The point representing the production of nothing but honey would remain unchanged because the improvement in wheat seeds is not useful in honey production.

You will find many uses for this model and economics. For example, it is used to determine which goods in the economy should export and which it should import. Thanks for exploring the possibilities.

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