Question

A small country, Ruritania, produces only two goods, shoes and soybeans. Its economic resources are limited, so any factors of production (land, labor or capital) which are added to shoe production must be taken from soybean production, and vice versa. Consequently, to produce more of one good it must be willing to produce less of another. The table below shows various combinations of maximum quantities of shoes and soybeans which Ruritania can produce. Using the data in the table, construct a production-possibility curve for Ruritania.

Short answer

To construct a production-possibility curve for Ruritania, first organize the given data into two arrays for shoes and soybeans production. Next, create a coordinate system with axes for the quantity of shoes and soybeans. Plot the data points for each pair of productions on the coordinate system, and draw a smooth curve that represents the trade-off between producing more of one good at the expense of producing less of the other. Finally, interpret the curve as a visual representation of Ruritania's maximum possible production combinations, given the limited economic resources available.

Step-by-step solution

Organize the data

First, gather and organize the data from the table, showing the different combinations of shoes and soybeans productions. It will be useful to put the data into two arrays: one for shoes and one for soybeans. Take note of the maximum and minimum values for both products, as they will be useful when constructing the curve.

Create a coordinate system

We need a coordinate system with two axes: one representing the quantity of shoes produced and the other representing the quantity of soybeans produced. The origin (0, 0) represents the state of no production for either good. Then, plot the maximum and minimum values from step 1 to set the range of the axes.

Plot the data points

Now, plot each pair of shoes and soybeans production on the coordinate system. For example, if one combination has a production of 100 shoes and 200 soybeans, mark this point on the graph where the shoe axis value is 100, and the soybean axis value is 200.

Draw the production-possibility curve

The production-possibility curve should pass through or be close to the plotted data points. It should be a smooth curve that shows the trade-off between producing more of one good at the expense of producing less of the other. Make sure the curve meets or exceeds the maximum values for shoes and soybeans production.

Interpret the curve

The production-possibility curve visually represents the trade-offs involved in allocating resources between the production of shoes and soybeans. Points on the curve indicate the maximum possible production combinations of shoes and soybeans. Points inside the curve represent inefficient allocation of resources, while points outside of the curve represent unattainable production combinations given the current resources.

Key concepts

Economic Resources Allocation

Understanding the allocation of economic resources is crucial when studying how an economy decides to distribute its limited inputs—land, labor, and capital—among different outputs such as goods and services. In our example of Ruritania, a country that can produce only two goods, shoes and soybeans, allocating resources between these two products is a fundamental economic decision. Ruritania must utilize its economic resources, including land suitable for farming soybeans or factories for making shoes, labor from its workforce, and capital such as machinery and tools, in a manner that maximizes the country's overall welfare.

It is clear that every decision to allocate more resources to shoe production inevitably requires a reduction in soybean cultivation, and vice versa. This illustrates the concept of opportunity cost, which is the value of the next best alternative foregone as a result of making a decision. The production possibility curve (PPC) is a useful tool for depicting the trade-offs and allocation decisions an economy faces. By analyzing the PPC, economists and decision-makers can understand the most efficient way to use their scarce resources to achieve the desired balance of goods production.

Trade-Offs in Production

Every decision in the production process involves trade-offs, especially when resources are scarce. The concept of trade-offs in production is central to the understanding of an economy's capabilities and limitations. In the case of Ruritania, the trade-off is between producing shoes and soybeans. Importantly, if Ruritania decides to allocate more resources to increase shoe production, it must reduce the resources available for soybean production; this embodies the trade-off.

To make these trade-offs clear and to assist in understanding the implications of various resource allocation scenarios, economists use the production-possibility curve. Each point on this curve represents a different balance between producing shoes and soybeans, showing the maximum possible output that can be achieved from the given resources. The curve's slope highlights the rate at which one good must be forgone for the production of another, encapsulating the trade-off between the two. Ideally, Ruritania would like to operate on the PPC itself, which indicates efficient allocation of resources. Operating inside the curve could imply underutilized resources, while producing beyond it is typically unfeasible without an increase in resources or improvements in technology.

Factors of Production

Factors of production include all resources needed for the creation of goods and services; these are typically grouped into land, labor, and capital. Working with our example, Ruritania's production capacity for shoes and soybeans is determined by these factors. Land refers to all natural resources used to produce goods and services, like the fields to grow soybeans or the physical space to locate a shoe manufacturing facility. Labor is the human effort that goes into production, encompassing the workforce of farmers and factory workers in Ruritania. Capital represents the machinery, buildings, tools, and technology that assist in the production process.

These factors are the building blocks of an economy's output, and their availability and efficiency of use heavily influence an economy's position on the production possibility curve. A nation's capability to effectively manage these factors of production not only affects its current productive capacity but also its potential economic growth. Innovations in technology, enhancements in skill levels, and improvements in the management of land resources can shift the PPC outward, symbolizing growth in the potential output of an economy.