Question

“Economic Freedom” is defined as freedom to choose.  How is this concept important for understanding the usefulness of the production possibilities curve.  Give an example in your answer.

Answer 1

The usefulness of a production possibility curve is very dependent on the degree of economic freedom. Lets see how.

Production possibility curve tells us how much can be produced by a country, a firm etc, based on given resources. If there are two products that can be produced, then the country/firm must choose how to allocate the limited resources (land, labor, capital etc) between the production of the two products. These choices are represented in the production possibilities curve. It tells us the possible quantity of the products we can make based on available resources.

But how does its usefulness depend upon economic freedom? That is because the production possibility is dependent on the resources 'assuming' those resources are available without any other constraint than their availability. For example, it assumes that labor is free to move in the market, that there are no regulations that prohibit or limit the usage of any resource- that its only the free market that is deciding the availability of those resources and nothing else.

Lets take that with an example. Suppose the production possibility curve of a company in France usage the assumption that they have 1000 labor available. A lot of this labor comes from other EU countries, such as Poland. The EU countries allow labor to move freely so thats not a concern. Now, suppose Poland blocks its labor to move to France for some reason. This results in the production possibility curve no longer being useful because the assumption of labor availability is not there now. So, Poland reducing the economic freedom resulted in impact on the usability of the production possibility curve! Similarly, we can think of a country restricting use of a particular mineral, imposing tariffs and quotas, estabilshing environmental controls etc that will all affect economic freedom and hence- the production possibility curve.