1.4: Production Possibilities

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Page ID: 210822

Martin Medeiros
Chabot College

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Scarcity is all around us and there is no escaping it. Since scarcity is ubiquitous, we will assume it is always present.

Factors of production

Factors of production are the inputs in the production process. Imagine a factory floor on which cars are being manufactured. All elements in the production process are factors of production. Some factors are tangible (i.e., physical) and others intangible (i.e., ideas).

Factors of production are resource inputs used to produce goods and services.

To produce something, one needs land (and other natural resources such as crude oil, water, air, and minerals) on which to work; physical capital to house the company (i.e., plant, storage facilities) and automate production (i.e., machinery); labor to command the equipment and handcraft raw materials; entrepreneurship to devise a new business plan and hatch new product ideas.

All production processes need some combination of all these factors of production. Nothing can be produced if just one of the four is missing (no matter how much of the other factor one has).

We will assume that at least one of the four factors of production is in scarce supply. This scarcity means hard choices must be made because no one had enough factors of production to produce what they want; how they want; and for whom they want.

Production possibilities are the alternative combination of final goods and services that could be produced in each period with all available resources and technology.

Production Possibilities Curve

The production possibilities curve (PPC) is a graphical representation of the combination of goods which can be produced with a limited number of factors of production.

News Alert

The Bureau of Labor Statistic released their monthly PPC for the U.S. (see Chart 1) Employment dramatically changed in February, compared with market expectations for no change.

A diagram of goods and serviceDescription automatically generated

The PPC above shows change in the production mix of the U.S. between the months of January and February. Given the situation depicted in the graph and described in the News Alert, which of the following best describes the change in the U.S. economy:

Unemployment is falling.
Production is falling.
Unemployment is rising.
No change in economic activity.

One of the main functions of the PPF is to show the costs associated with output decisions. If you want more trucks, then you must take away resources from other industries (e.g., tanks) and send them to the truck plant. Therefore, the opportunity cost for one more truck can be measured in terms of lost production from resource depleted industries. If producing one more truck means tank production falls by two, then two tanks are the opportunity cost for one truck.

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