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Production Possibility Frontiers/Curves
The Sett=
ing
•<=
/span>Production
Possibility Curves/Frontiers measures the maximum production of a=
society
that produces only 2 goods
•<=
/span>The
two goods are interdependent, meaning anytime you make =
more
of one good you have to make less of the other…this
tradeoff is the opportunity cost!
•<=
/span>
Assumpti=
ons
•<=
/span>All
Economic Models rely on a set of assumptions
•<=
/span>Assumption
1- Bigger is Better—All things being equal as long as bo=
th
good 1 and good 2 are desirable, a curve further from the
origin is better than a curve closer to it.
•<=
/span>Assumption
2- A society wants to produce at maximum efficiency
Factors =
of
Production
•<=
/span>In
order to make the goods you need certain inputs, since the
goods are generic, so are the factors of production
•<=
/span>Three
Factors of Production—plus the so-called Multiplier!
–Labor
–Land
–Capital
For later
Use
=
•<=
/span>In
Economics the payoff for each of the factors of Production is as
follows
–Labor- Wages
–Land- Rent
=
–Capital –
Interest
•<=
/span>Multiplier????------Entrepreneurial
Ability--------àPROFIT!!!
To Draw =
the
Curve
•The curve measures the maximum output possible
of two goods with current Factors of Production- Presently
Existing-
•Example Using Land, Labor and Capital how
many Cars and how many Tomatoes can a society produce
The Cur=
ve
as a Straight Line
•Linear Production Possibility Curve
![](3D"slide0007_image=)
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Cars
Tomatoes
ineff=
icient
100% efficient
This area is Impossible w/out a change in the factors
of production
Lin=
ear
Curve
<=
span
style=3D'mso-special-format:bullet;position:absolute;left:-2.58%'>-=
Constant
Slope
-Means that the trade off or =
=
opportunity
cost remains standard throughout
Getting
Beyond the Curve
•<=
/span>A
Change in any one of the Factors of Production will lead to a
change in the PPC
•<=
/span>
![](3D"slide0008_image004.gif")
![](3D"slide0008_image005.gif")
Cars
Tomat=
oes
0
100
11000
100
Increase in possible =
production of tomatoes due to increase of land labor or capital
Decrease in possible production of tomatoes
due to decrease of land <=
/span>labor or capital
Why Bigg=
er
isn’t always Better
•Shifts outward in the Production Possibility Curves-due
to a population increase
![](3D"slide0009_image007.gif")
100% increase in production due to a 100%
increase in population- means the pie gets bigger but
the slices of the pie remain the same
cars
tomat=
oes
Why do =
we
care? So what?
•<=
/span>Economic Goals
–As long as=
both
goods that a society makes are desirable
then more is better
–A bigger p=
ie is
better than a smaller pie.
Economic Stren=
gth is
sometimes measured by the size of the Pie – e.g. China is a world economic power b=
ecause
of its economic s=
ize
despite the fact the slices are small
slivers
–<=
/span>But a bigger slice is better than a smaller slice&=
#13;
•Best case
scenario, the Pie gets bigger at a faster pace than any of the inputs
THE
MULTIPLIER
•A BETTER MOUSETRAP!!!&=
#13;
–Entrepreneurial
Ability-
•<=
/span>Changes
in Technology and/or Practices can shift the Production Curve out =
to
the right without any increase in the factors of
production
•Examples-
=
–<=
/span>Agricultural
Revolution- Better Crop Yields with mutated seeds
–<=
/span>CAD/CAM
allows faster production of architectural projects
–<=
/span>Assembly
Line – Specialization allowed Henry Ford to build
better cars at a lower cost
•<=
/span>
Opportunity Cost and Specialization and Henry Ford
•<=
/span>The
Production Possibility Curve measures the Trade Off in Choosing <=
/span>making
one good versus making another
•<=
/span>The
Assembly Line – Each person becomes proficient at one
particular task. By
specializing at that one task the company can make goods at a
lower per unit cost.
Pushing =
the
Envelope
•<=
/span>The
faster the PPC pushes out the faster growth takes place
•All countries seek to
increase their PPC
•<=
/span>The
measurement of a country’s Production in a given year=
is
called GDP
•<=
/span>GDP
stands for Gross Domestic Production
GDP (to be studied later)
•<=
/span>GDP=3D C + I +G + (x-m)
•<=
/span>C=3D Consumption
•<=
/span>I=3D Investment
•<=
/span>G=3DGovernment Spending
•<=
/span>X=3D Exports
•<=
/span>M=3D Imports
•<=
/span>The US GDP for 2004 was appr. $11 Trillion
•<=
/span>Per Capita GDP in the US is appr. $37,000.00
Rule of =
72
<=
span
style=3D'mso-special-format:bullet;position:absolute;left:-4.07%'>•<=
/span>The
US GDP grows at approx. 3% rate
•The Rule of 72 is a quick way to determine how
fast a number doubles
<=
span
style=3D'mso-special-format:bullet;position:absolute;left:-4.43%'>•<=
/span>The
numerator is 72
•The denominator is the percentage rate of growth
but take away the decimal point
•At 3% any investment will double in 24 <=
span
style=3D'position:absolute;top:74.25%;left:9.73%;width:84.45%;height:6.75%=
'>years
<=
span
style=3D'mso-special-format:bullet;position:absolute;left:-4.43%'>•<=
/span>72/3=3D24
Fast Gro=
wth
v. Slow Growth
•<=
/span>THE
WONDERS OF COMPOUND INTEREST
•<=
/span>$100
invested at 2% over 40 years will become approx. $215.00=
3;
•<=
/span>$100
invested at 6% over 40 years will become approx. $1200.00 (<=
span
style=3D'font-size:75%'>note the interest rate is 3x 2% but the increase (215 to 1200) is al=
most 6x!!!)
•<=
/span>
Pro Grow=
th
Policies
•A country =
tries
to devise policies that foster entrepreneurial
growth so that in the long run their
country’s will witness strong sustainable =
growth
•<=
/span>What those policies are is debatable
–<=
/span>Infant industry (Alexander Hamilton)
–<=
/span>MITI (Japan’s policy in the 70s and 80s)
=
;
– Internet, Interstate and Velcro à=
; None created by Al Gore but all created by the US Govt.
Throwing=
a
Curve in
•The PPC- Where the
“C” comes from
–<=
/span>The
PPC is not a Linear Curve but a Convex Curve
![](3D"slide0018_image009.gif")
cars
tomatoes
So Who Cares???
Remember Linear Curves hav=
e a
constant slope
This means the Opportunity
Cost or Trade off by
making one good instead of another=
is
also constant- The Slope =3D The Trade Off
A
Curve has a constant changing slope
This means the opportunity cost is constantly
changing
![](3D"slide0018_image010.gif")
The
Constantly Changing Slope
•AT THE TOP =
OF THE
CURVE 1 CAR IS VERY EXPENSI=
VE. BY
GIVING UP THE PRODUCT=
ION OF
ONE CAR SEVERAL TOMATOE=
S CAN
BE GROWN
•At THE BOT=
TOM OF
THE CURVE 1 TOMATO IS VERY
EXPENSIVE. BY GIVING UP THE PRODUCTION
OF ONE TOMATO A BIG PORTION=
OF A
CAR CAN BE MADE
•<=
/span>WHY????
BACK TO THE FACTORS OF <=
span
style=3D'position:absolute;top:12.75%;left:5.99%;width:88.2%;height:8.5%'>=
PRODUCTION
•When Bob picks his baseball team-> who does
he pick first??? Who does he pick last?
•THEORITICALLY!!! WHO DOES GENERAL
MOTORS PICK FIRST TO MAKE CARS? WHO LAST?
•WHICH LAND IS USED FIRST TO GROW TOMATOES,
WHICH LAND IS LAST USED?
RATIONAL
THOUGHTS
•<=
/span>If
we are only growing tomatoes, the first people hired to make cars =
will
be the best car makers, therefore the first cars made will
be made at the least cost. &=
#13;
•<=
/span>As
we produce more and more cars we use resources less and less
adapted to car production therefore production will become
less and less efficient
Rational
Thoughts II
•<=
/span>If
we are only making cars, the first land used to grow tomatoes will=
be
the best land available. Therefore the first tomatoes <=
/span>made
will be made at the least cost.
•<=
/span>As
we produce more and more tomatoes we use resources less and
less adapted to tomato production therefore production will become
less and less efficient
•<=
/span>
NO
GOLDILOCKS
•While Goldilocks was the epitome of compromising…NOT
TOO HOT NOT TOO COLD NOT TOO HARD NOT TOO SOFT…Being
in the middle of the curve on the PPC is no better than any oth=
er position. One society might like lots of tomatoes,
another lots of cars
•Remember all points on the Curve are Production
at 100% efficiency
' + ENDSHOW_MESG + '
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