CHOOSING AMONG ALTERNATIVES

When resources are limited relative to wants, we must choose among alternative ways of using the resourcesamong alternative products we might use the resources to produce. We face the need to economize. Economists are fond of illustrating this problem with a simple examplean economy that must choose between guns and butter, between missiles and margarine. Guns and butter symbolize any two competing groups of commodities for which we might use our resources.

The Produchoss-Passibilities Curve

Assume that our economy has a fixed stock of productive resources (land, labor, machines, and the like) and of technological knowledge about how to use these resources in producing the things we want. With these resources and this technological know-how, we can produce guns or buttermilitary or civilian goods—or some combination of the two. To simplify, assume that onlythese two commodities (or groups) can be produced.

Table 2-1 shows the range of possibilities open to us. If we use all our resources to produce butter, we can have 10 million pounds a year. Or if we use all our resources to produce guns, we can have 50,000 guns. In between various combinations are possible—for example, 8 million pounds of butter and 15,000 guns, or 6 million pounds of butter and 25,000 guns, and so on.

The point of this table is to show the many production possibilities open to us, even when we assume a very simple economy producing only two products. Of course, guns and butter are merely arbitrary examples. We might have used highways (a public good) and refrigerators (a private good), or any other pair of products to illustrate the same point. The important thing to see is that there is a trade-off between the two com-modities. ‘With limited resources we can get more of one only by giving up some of the other. We face the problem of economizing.

It is convenient for many purposes to put the production-possibilities table in the form of a curve, or graph. This is done in Fig. 2-1.

Economists use graphs a great deal, so it is important to understand how to read them. In Fig. 2-1, we show millions of pounds of butter along the horizontal axis, and thousands of guns along the vertical axis. Each heavy dot plots one of the production possibility combinations from Table 2-1. For example, the top dot shows that we may produce no guns and ten million pounds of butter. The next dot shows we may produce eight million pounds of butter and 1 5,000 guns, and so on for the other dots. The figure is merely a graphical representation of the table.

FIG. 2-1 The curve shows how much butter, bow many
guns, or what combination of guns and butter we con
produce with our limited stock of resources.

It is generally convenient to join the dots together with a line, or curve, to show approximately what the situation would have been if we had plotted all the dozens of possible intermediate combinations, instead of merely the six shown in the table. As the table indicates, the more guns we make, the less butter we can have, and vice versa. The production-possibilities curve we have plotted shows the alternatives open to us, given our limited stock of resources.

Some Applications

The production-possibilities curve can help illuminate a variety of economic problems. Sup-pose that, possibly because of a depression, the economy only produces 25,000 guns and four million pounds of butter, as shown by the dot
labeled “x” to the left of the production-possi- bilities curve. This dot shows that the economy is not fully utilizing its productive capacity, as in fact happens during depressions. To operate at point “x” is clearly to waste productive resources.
We could have had an additional two million pounds of butter and the same number of guns, or an additional 15,000 guns and the same amount of butter, if we had employed all our resources.Economists sometimes say that when an economy operates at point “x” it is operating in-side the production-possibilities “frontier.” That is, the production-possibilities curve shows the largest amounts of production that we can have with our limited resources. We are inside the frontier when for some reason we don’t fully utilize our productive capacity.

Now suppose that the population increases so that we have more workers than before, or that scientists improve technology so that we can obtain more output from the same amount of re-sources. Thus, in year two there will be a new production-possibilities curve to the right of the year-one curve. This can be illustrated as in Fig.2-2. TJie curve labeled “year one” is the same as in Fig. 2-1. The curve for “year two” is further out, to the right. It shows that the production possibilities are larger than before; the production frontier has moved out. This new curve for year two shows economic growth. The economy can now produce a larger total output—more missiles with the same amount of margarine, or vice versa, or a combination involving more of both.

FIG. 2-2 If a nation’s resources expand or its technol.
ogy improves, its production-possibilities curve moves out,
to the right. This expansion of productive capacity is the
essence of economic growth.

An economy producing only two goods may seem extremely over-simplified. Yet many times throughout the chapters ahead, a production-possibilities curve will prove a useful simplification to illustrate the possibilities of moving the production frontier out, the results of operating inside the production frontier, or the ever-present need to choose among alternative uses of resources in a fully employed economy. Unless we can move the production-possibilities curve out, we can have more of one product only at the cost of accepting less of another.