3. Production Possibilities Frontier as a Model Illustrating Scarcity

Let's have an example of a model in economics. At the same time, it will be a model that illustrates what economists mean by scarcity. The model we shall use for our example is the Production Possibility Frontier model. To repeat, scarcity and choice go hand in hand. Productive resources are always scarce, since we cannot increase the output of one kind of product without decreasing that of another. Of course, our economy produces many kinds of goods and services, so that we may be able to understand that better if we think in terms of a model. For our model, let us think of an economy that produces just two kinds of goods: "machines" and food.

At any given time, a country cannot produce more machines without producing less of something else. (In this case, the country produces less food). Table 1 below shows, for the model country, how much food they can produce given each respective output of machines. For example, to increase machine output from 7000 to 8000, they would have to cut food output from 1020 to 720.

Table 1

m achines	food
0	2000
1000	1980
2000	1920
3000	1820
4000	1680
5000	1500
6000	1280
7000	1020
8000	720
9000	380
10000	0

Figure 1

This relationship is called the "production possibility frontier."

Many models in economics can be expressed by diagrams. Here is a diagram of the production possibility frontier in the table on the previous page. A combination of food and machines is said to be "feasible" if the economy has enough resources to produce both. In the figure, all feasible combinations of food and machinery are on or underneath the curve. Combinations above the curve are not feasible − there is not enough resources to produce that much of both.

The numbers and the exact formula may depend on the time and place and circumstances, as, for example, the Production Possibilities Frontier can change over time as new techniques are discovered or resources are used up. As a rule, statistical methods will have to be used to estimate them.

The model we have just explored illustrates some basic ideas from neoclassical economics, ideas which any modern economics will take into account:

1) that there is scarcity whenever we have to make a choice between different uses to which resources can be put;

2) that our limited resources and technology set a limit to how much of any good or service that we can produce, but we can still "trade off" one kind of good (food in the model) for another (gadgets in the model);

3) that we can increase the production of one good only by diverting resources from another good, so that we suffer an "opportunity cost," that is, the loss of the opportunity to enjoy the other good.

We understand that the allocation of resources is a social problem in any modern economy. Any modern economic system must somehow answer the questions posed by the allocation of resources.