Institution”Guns and Butter”-Allocation of Resources

The concept of Guns and butter is used when exploring the classical tradeoff between expenditure on national defense and consumption of goods. Upon grouping of individuals in the societies, they face different kinds of trade-offs. According to classical economics, the tradeoff is between guns and butter. The more the spending on national defense by government through purchase of guns to protect its shores from foreign aggressors, the less it does on spending on the consumption goods (butter) to raise living standards.

In the production possibility frontier (PPF), there are elaborations on scarcity elements and the alternative goods that are produced identified as guns and butter. In simple terms, the guns and butter concept brings out the notion that we can acquire and have more wartime goods, but only if there are fewer peacetime commodities. The two alternative outputs, that is, guns and butter are negatively related to each other. Even though some of the resources in the economy are suitable for output production, some are meant to meet the peacetime needs. Therefore, when there arises the need for economy to change the mix of outputs, there must be efficient allocations of resources suited to produce one output so that the other is also easily produced. Therefore, the nation has to forego the increasing quantities of peacetime goods in order to ensure additional production of wartime goods.

Using the production possibility frontier (PPF) we can represent scarcity levels in society, cost of commodities and efficiency in production. In the simple terms, the economy that the president refers to can produce just two goods that is, “guns” and “butter”. Using the PPF, we can table or graph different combinations of two goods produced with a given technology and total factor inputs which would be a constraint to feasible total output. Every point on the PPF curve represents potential total output for the economy which is the maximum feasible output of a single commodity, given a feasible output quantity of the other good.

Scarcity of the two goods produced in the economy is represented by consumers who are willing but unable in the aggregate to reach consumption beyond the PPF. Additionally, scarcity is represented by negative slope as well. Therefore, in the PPF curve if a production of one good increase along the curve then the production of the other good decreases hence showing the inverse relationship that exists. This relationship in production is mainly because an increase in output of one good requires the transfer of inputs to it from production of the other good. The slope of the PPF at any point shows the trade-off between the two goods consumed. The slope measures the amount of additional unit of one good costs in units when the other is forgone thus representing the real opportunity cost. Therefore, if an additional gun costs 1000 units of butter, the opportunity cost of one gun can be said to be 1000 butter. Along the PPF, scarcity represents the consumer choice of one commodity in the aggregate and consuming less of the other product. A movement along the curve in the market economy is an indicator that the choice of the increased output is projected to meet the cost to the agents.