Alternatives in Production

Our planned economy will be located in a fictitious country called "Economia." To make it a little easier for our hypothetical economic planners, we will give Economia a very simple economy to manage -- one that produces only two goods. The two goods will be called "food" and "machinery." Machines can be used as tractors for the production of more food or of more machines (that is, as investment goods) or for personal transportation (that is, as consumer goods). Food can only be used as a consumer good. Now, the more food Economia produces, the fewer machines they can produce, and conversely. Here's the reasoning: in order to produce more machines, they will have to allocate more resources to the production of machines, and so less resources will be available for the production of food. This will be expressed, as in chapter 1, by a production possibility frontier.

This is illustrated by Table 1, which shows different quantities of machines in the first column and the upper limit on the quantity of food that can be produced, along with that quantity of machines, in the second column. Alternatively, but just as correctly, the table shows different quantities of food in the second column and the upper limit on the quantity of machines that can be produced, along with that quantity of food, in the first column.

Table 1
machines	food
0	1000
100	990
200	960
300	910
400	840
500	750
600	640
700	510
800	360
900	190
1000	0

Of course, we have discussed this concept of a Production Possibility Frontier in Chapter 2, but let's pause to recall how to interpret and visualize it. We will apply the ideas to efficient allocation of resources as we continue in the chapter.

Mathematical Details