The Production Possibilities Model by Omkar Abhyankar

 In the last couple articles, we discussed the production of economies. In particular, we looked at how they should decide what to produce and how much. We also discussed how various economies trade with each other. In this article, we will be taking a graphical approach to learning more in depth about the different combinations of goods which an economy can produce, an economy’s maximum potential to produce, and how trade impacts an economy's productions.

To start off, let’s look at a graph of an economy producing books and pencils:

The curve, called the Production Possibilities Curve, represents an economy’s maximum potential of producing all the different combinations of pencils and books. In other words, every point on this curve represents a combination of books and pencils which the economy can produce if it uses up all of its resources. We see that the curve hits the axis labeled “Pencils” at the number 200 and hits the axis labeled “Books” at 100. This means that if the economy allocates all of its resources towards producing only pencils, then the economy can produce a maximum of 200 of them and if the economy allocates all of its resources towards producing only books, then the economy can produce a maximum of 100. Now let’s interpret the meaning of all the labeled points on this graph. For example, at Point A on the curve indicates that the economy can use all of its resources to produce a combination of 190 pencils and 20 books. At Point B, we see that the economy can use up all of its resources to produce 170 pencils and 40 books. At the final point on the curve, Point D, we see that the economy can alternatively use up all of its resources to produce a combination of 80 books and 80 pencils. For any point on the curve, as with Points A, B, and D, the economy is said to be efficient since it is utilizing all its resources to produce at its maximum potential. Points under the curve, however, represent combinations of books and pencils being produced where all resources are not used. For example, Point E under the curve represents a combination of 30 pencils and 75 books being produced, but the economy is not using up all of its resources to produce this combination. This is why we say the economy is inefficient. Points outside of the curve represent combinations of books and pencils which cannot be produced because the economy does not have enough resources to produce at that level. This can be seen at Point C, which lies outside the curve and therefore represents a combination of books and pencils that is unattainable from the economy's current number of resources. 

This begs the natural question: Is Point C forever out of reach of this economy’s grasp, or can it be attained even with the economy’s limited resources? As it turns out, points above the curve, like C, are in fact attainable! In the last article we talked about trades between two economies and how a successful trade can help both economies produce at more efficient levels. Indeed, if an economy like the one represented in our graph above performs a successful trade with another pencil and book producing economy, then both economies would be able to obtain a greater number of pencils and books, allowing both economies to reach past their maximum potentials (making points such as C within reach). In the next article, we will discuss how the shape of the Production Possibilities Curve reflects the change in opportunity cost for the goods.