The Production Possibilities Model

The production possibilities model is how economists figure out how much they can produce of what.

Let’s say we're choosing how to split resources between iPods and timers.

At point A, all resources go to making iPods, zero timers.

At point F, it’s the opposite. All timers, no iPods.

The line represents the frontier. Anywhere along the line represents full utilization.

But notice how in order to make more of one, you have to give up some production of the other. That’s the trade-off, and in order to produce one, you have to pay the opportunity cost of the other.

Now, anywhere below this line is possible. It’s not economically optimal, but it is possible.

But anywhere above the line is not possible.

UNLESS we increase productivity

In the next entry, we’re going to talk about how to predict when a society can do that.