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 2, 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.
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