Production Possibility Frontier - Main Video - Apples and Ore

Economics is the study of how individuals make choices in a world of scarcity. The things we want and desire are limitless. Unfortunately, the resources that we need; the natural resources, the labor, the capital and the entrepreneurial talent, are limited. So, we have to decide if we are going to use our resources to produce one good or another.

Here, in the upper peninsula of Michigan, we can produce iron ore pellets, provide coal to the rest of the world, and grow apples. So, how do we decide what to produce, when to produce and for whom to produce?

We often use, in the economic world, what we call a productions possibilities frontier, in order to display the two extremes. We know that we can produce an unlimited number of goods and services, but economists often narrow it down to the top two.

In the upper peninsula, let's assume that one of our primary production outlets happens to be apples.

So, let's map apples on the vertical axis of our production possibilities frontier. Let's assume we take all of our resources, and we dedicate those resources to the production of apples. In the example that we have here, we see that we can produce 500 million bushels of apples.

By contrast, let's assume that we switch and we decide that, instead of producing apples, we decide to redirect all of our resources to the production of iron ore. Well, let's assume we can produce, not 500 million bushels of apples, but instead, we can produce 500 billion tons of iron ore.

Now, we know we don't live in a world of two extremes, and that we have trade offs, and that, if we produce a little less iron ore, and we redirect some of our resources into the production of apples, we will give up some iron ore, but then we gain some apples.

The production possibilities frontier connects the two dots. It illustrates all possible combinations of output that can be produced in any region, like the upper peninsula of Michigan.

Some would say it would make sense to direct all of our resources into the production of iron ore. But, wait a minute!

It may make sense to also produce some apples, because we have to look at the dynamically changing world, and we have to look at prices to convey important information. Chances are, we're going to produce some combination of iron ore pellets and apples in the upper peninsula of Michigan.