Production Possibilities Table
A Production Possibilities Table lists a choice's opportunity costs by summarizing what alternative outputs you can achieve with your inputs. Listed below are two tables. In the first table, the input is simply the percentage of resources the country is devoting to production and the output is either "rice" or "iron ore".
There are numerous options available to our fictitious country. It could decide to produce only rice and accumulate 100 tons. Or it could decide to devote only 20% of its production to rice and produce 20 tons, while devoting 80% of its production to Iron Ore and producing 20 tons. Whatever combination the country decides on one thing is constant: if it wants to produce more rice it has to produce less Iron Ore, and if it wants to produce more Iron Ore it has to produce less Rice. This reflects the Opportunity Costs associated with production. Or more specifically, if the country wants 20 more tons of Rice it must give up 5 tons of Iron Ore. This 5 tons of Iron Ore is the Opportunity cost of producing 20 tons of Rice. This opportunity cost is constant throughout the table.
In the second table listed below, the input is again simply the percentage of resources the country is devoting to production but the output is either "guns" or "butter".
Notice that once again there are numerous options available to our fictitious country with regards to guns and butter. It could decide to value peace above all else and focus entirely on butter production, yielding 19 pounds of butter for its efforts. Or it could take an opposite stance and devote 80% of its resources to gun buildup, giving it 16 guns but leaving only 20% of its resources for butter production and yielding only 7 pounds of butter. Alternatively it could make a more moderate decision and devote 40% of its resources to the production of guns and 60% of its resources to the production of butter, yielding 10 guns and 16 pounds of butter. Whatever combination the country decides on, one thing is constant: if the country decides to produce more guns, it has to produce less butter and if the country wants to produce more butter, it has to produce less guns. This reflects the Opportunity Costs associated with production.
However, there is something about the relationship between "Guns and Butter" that is different from the relationship between "Iron Ore and Rice". Whereas the relationship between "Iron Ore and Rice" had constant Opportunity Costs associated with it (our country always had to give up 20 tons of Rice to produce 5 additional tons of Iron Ore), the Opportunity Costs associated with "Guns and Butter" change depending on how much of each our country decides to produce.
Take a closer look. If our country is devoting 100% of its resources to Butter production and decides it wants to produce 6 Guns, it only has to give up 1 pound of Butter (the Opportunity Cost of producing 6 additional Guns). Suppose our country decides it needs more Guns. In order to produce 10 Guns (4 more than it originally was producing), it must give up 2 pounds of butter (by producing 16 pounds of Butter rather than 18 pounds). Thus the Opportunity Cost of producing 4 additional Guns is 2 pounds of Butter. Now, let's suppose that our country is devoting 80% of its resources to Gun production and producing 16 Guns but it decides it needs more. In order to produce 1 additional Gun it must give up 7 pounds of Butter.
As you can see, as our country increases its Gun production, it gets fewer and fewer guns for each pound of Butter given up. That is the Opportunity Cost of choosing guns over butter increases as we increase the production of guns. This concept is called the Principle of Increasing Marginal Opportunity Cost. This occurs because some resources are better suited for the production of butter than for the production of guns, and we use the more efficient resources first.
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