Factors of Production and the Production Possibilities Curve

2.2 The Production Possibilities Curve


Suppose a manufacturing firm is equipped to produce radios or calculators. It has two plants, Plant R and Plant S, at which it can produce these goods. Given the labor and the capital available at both plants, it can produce the combinations of the two goods at the two plants shown.

Output per day, Plant R
Combination Calculators Radios
A 100 0
B 50 25
C 0 50

Output per day, Plant S
Combination Calculators Radios
D 50 0
E 25 50
F 0 100

Put calculators on the vertical axis and radios on the horizontal axis. Draw the production possibilities curve for Plant R. On a separate graph, draw the production possibilities curve for Plant S. Which plant has a comparative advantage in calculators? In radios? Now draw the combined curves for the two plants. Suppose the firm decides to produce 100 radios. Where will it produce them? How many calculators will it be able to produce? Where will it produce the calculators?