Making a fuller use of the resources

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Units of clothing (millions)

For example, production could take place at point x, with 6 million units of food and 4 millions of clothing being produced.

Production cannot take place beyond the curve, for example, at point w: there are not enough resources to do this.

The fact that to produce more of one good involves producing less of the other is illustrated by the downward sloping nature of the curve. For example, the country could move from point x to point y in Figure 2.2. In doing so it would be producing an extra 1 million units of clothing, but 1 million fewer units of food. This diagram is to a large degree a simplification, but it still allows important principles to be illustrated. A production possibility curve illustrates the microeconomic issues of choice and opportunity cost.

It also illustrates the phenomenon of increasing opportunity costs. Figure 2.2 Increasing opportunity costs.

Units of food (millions)

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Y

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Units of clothing (millions)

As production moves from point x to y to z, the amount of food sacrificed rises for each additional unit of clothing produced. The opportunity cost of the fifth million units of clothing is 1 million units of food. The opportunity cost of the sixth million units of clothing is 2 million units of food. In other words, as the country produces more of one good, it has to sacrifice ever-increasing amounts of the other. The reason for this is that different factors of

production have different properties. People have different skills. Land differs in different parts of the country. Raw materials differ, and so on. Thus as the nation concentrates more and more on the production of one good, it has to start using less and less suitable resources.

If not all the resources are used in the country, the nation will be producing at the point inside the curve (Figure 2.3), say, point v. The economy is producing less of both goods than it could possibly produce. The reason may be unemployment. By increasing employment the nation could move out on the curve: to point x or y. It means it could produce more clothing and more food (proportions will be different).

Figure 2.3. Macroeconomics and the production possibility curve.

Food

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