Factors of Production and the Production Possibilities Curve

Read Sections 2.1 and 2.2. Take a moment to read through the stated learning outcomes for this chapter, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter. Also, attempt the "Try It" problems for each section before checking your answers.

The first section of the chapter will introduce you to the four factors of production that are present in the economy: labor, capital, natural resources, and entrepreneurship. Using any two factors of production, you can then learn to construct the production possibility frontier (PPF) in a two plane model. Note the economic implications of the downward slope and the bowed-out shape of the PPF curve. Also, note the meaning of producing on the curve versus inside the curve. Lastly, think about what it means to move along the curve

2.2 The Production Possibilities Curve

Idle Factors of Production

Suppose an economy fails to put all its factors of production to work. Some workers are without jobs, some buildings are without occupants, some fields are without crops. Because an economy's production possibilities curve assumes the full use of the factors of production available to it, the failure to use some factors results in a level of production that lies inside the production possibilities curve.

If all the factors of production that are available for use under current market conditions are being utilized, the economy has achieved full employment. An economy cannot operate on its production possibilities curve unless it has full employment.

Figure 2.7 Idle Factors and Production

The production possibilities curve shown suggests an economy that can produce two goods, food and clothing. As a result of a failure to achieve full employment, the economy operates at a point such as B, producing F_B units of food and C_B units of clothing per period. Putting its factors of production to work allows a move to the production possibilities curve, to a point such as A. The production of both goods rises.

Figure 2.7 "Idle Factors and Production" shows an economy that can produce food and clothing. If it chooses to produce at point A, for example, it can produce F_A units of food and C_A units of clothing. Now suppose that a large fraction of the economy's workers lose their jobs, so the economy no longer makes full use of one factor of production: labor. In this example, production moves to point B, where the economy produces less food ( F_B) and less clothing (C_B) than at point A. We often think of the loss of jobs in terms of the workers; they have lost a chance to work and to earn income. But the production possibilities model points to another loss: goods and services the economy could have produced that are not being produced.