Glamor Economics

Chapter 57

Chapter 8, Section 4: Production of biscuits or instant noodles——Production Possibilities Frontier

A food company produces two products, biscuits and instant noodles.As the end of the year approaches, the company begins to formulate a production plan for the first half of next year. How should it be planned?We know that the company's resources (such as workers, machines, factories, funds, etc.) are limited, how to effectively use these resources to produce and maximize the company's profits is the key to the problem.If all resources are mobilized to produce biscuits or instant noodles, each will have a maximum production value.However, it is impossible for a company to produce only one item while ignoring another item. Both biscuits and instant noodles have their own markets. If any product is abandoned, the company will lose orders.Therefore, the core of managers' discussion is how to determine the output relationship between biscuits and instant noodles.

Situations like this are often seen in modern enterprises.In economics, this involves the concept of a "production possibilities frontier" (aka the production possibilities curve).The production possibility frontier refers to the maximum output that an economy can obtain under the condition of a given amount of input resources.In economics, the production possibilities frontier is an important concept that is key to understanding scarcity and other important issues.If the production of the enterprise is within this boundary, it means that effective production has not been reached; if it exceeds this boundary, it means that the target will exceed the production capacity of the enterprise, which is difficult to achieve.

The production possibility curve (as shown in the figure above) is used to represent the combination of the maximum number of various commodities that an economic society can produce under given resource and technological conditions.At point F, it means that under the given resources, G unit of butter and H unit of guns can be produced; at point C, it shows that under the same resources, B unit of butter and E unit of guns can be produced.The production possibility curve generally needs to make the following assumptions:
1.Fixed resources.At a certain time, the quantity of various factors of production available is fixed.

2.Full employment.In the existing production process, all production factors have been fully used, and there is no idle resource.

3.production technology.Production technology, that is, the ability to convert inputs into outputs, is fixed within the time frame considered.

4.Two products.To simplify matters, it is usually assumed that an economy produces only two goods, eg, butter and guns.

It can be seen from the graph that the production possibility curve is a curve with a negative slope and concave toward the origin (that is, convex outward). Its economic meaning can be explained as follows.

First, the production possibility curve reveals the law of scarcity.It is impossible for any economy to produce indefinitely.Point P in the figure represents a combination of yields that is impossible under modern conditions.

Second, any economy must make a choice, and it is impossible to choose two different points at the same time.At the same time, deciding to produce at a certain point on the production possibility curve means deciding the allocation of resources.

It is the trajectory of the maximum possible output combination under the given assumptions. It is generally concave to the origin, implying that the law of increasing cost is established.Any point on the curve represents a productive output combination, any point outside the curve (such as point P) indicates a production combination that is impossible under the existing assumptions, and an internal point (such as point Q) indicates that Lack of efficiency.

Third, there is a price to be paid for the choice, and there is an opportunity cost for the choice.The slope of any point on the production possibility curve represents the opportunity cost of X at that output level, and a negative slope indicates that increasing the production of one product will inevitably reduce the output of another product.

Fourth, the concave production possibility curve reflects the "law of increasing (opportunity) cost".It means that as the output of butter (Y) increases, the output of guns (X) that needs to be given up for every additional unit of butter output is increasing. In other words, the opportunity cost of butter increases with the increase of its output.

Fifth, the production possibility curve can illustrate the efficiency of resource allocation.An allocation of resources is technically efficient if it is impossible to increase the output of one product without reducing the output of other products.Any point on the production possibility curve implies that resource allocation is technically efficient.

Scarcity forces people to make choices.The production possibilities frontier concretizes people's choices.For a firm, the choice is to decide which point on the production possibility frontier to produce, that is, which combination of the two products to produce is.This choice depends on the consumer's personal preference, which is actually the combination of the necessity of survival and the desire of consumption.People who aim at maximizing consumption satisfaction will make rational choices, that is, choices that can achieve this maximization.Therefore, the choice can be made concrete by using the production possibility frontier.

[links to related words]

Technical efficiency refers to the results brought about by technological content, that is, good and fast.It is mainly used in the management of science and technology industry, in the way of management or the introduction of new technologies to improve the production efficiency of enterprises.

(End of this chapter)