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Production Possibility Frontiers/Curves

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Production Possibility Frontiers/Curves. The Setting. Production Possibility Curves/Frontiers measures the maximum production of a society that produces only 2 goods - PowerPoint PPT Presentation
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Production Possibility Frontiers/Curves
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Page 1: Production Possibility Frontiers/Curves

Production Possibility Frontiers/Curves

Page 2: Production Possibility Frontiers/Curves

The Setting

• Production Possibility Curves/Frontiers measures the maximum production of a society that produces only 2 goods

• 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!

Page 3: Production Possibility Frontiers/Curves

Assumptions

• All Economic Models rely on a set of assumptions

• Assumption 1- Bigger is Better—All things being equal as long as both good 1 and good 2 are desirable, a curve further from the origin is better than a curve closer to it.

• Assumption 2- A society wants to produce at maximum efficiency

Page 4: Production Possibility Frontiers/Curves

Factors of Production

• In order to make the goods you need certain inputs, since the goods are generic, so are the factors of production

• Three Factors of Production—plus the so-called Multiplier!– Labor– Land– Capital

Page 5: Production Possibility Frontiers/Curves

For later Use

• In Economics the payoff for each of the factors of Production is as follows– Labor- Wages– Land- Rent– Capital – Interest

• Multiplier????------Entrepreneurial Ability--------PROFIT!!!

Page 6: Production Possibility Frontiers/Curves

To Draw the Curve

• The curve measures the maximum output possible of two goods with current Factors of Production- Presently Existing-– Land – Labor – Capital

• Example Using Land, Labor and Capital how many Cars and how many Tomatoes can a society produce

Page 7: Production Possibility Frontiers/Curves

The Curve as a Straight Line

• Linear Production Possibility Curve

Cars

Tomatoes

inefficient

100% efficient

This area is Impossible w/out a change in the factors of production

Linear Curve

-Constant Slope

- Means that the trade off or opportunity cost remains standard throughout

Page 8: Production Possibility Frontiers/Curves

Getting Beyond the Curve

• A Change in any one of the Factors of Production will lead to a change in the PPC

Cars

Tomatoes0

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 labor or capital

Page 9: Production Possibility Frontiers/Curves

Why Bigger isn’t always Better

• Shifts outward in the Production Possibility Curves-due to a population increase

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

tomatoes

Page 10: Production Possibility Frontiers/Curves

Why do we care? So what?

• Economic Goals– As long as both goods that a society makes are

desirable then more is better– A bigger pie is better than a smaller pie. Economic

Strength is sometimes measured by the size of the Pie – e.g. China is a world economic power because of its economic size despite the fact the slices are small slivers

– But a bigger slice is better than a smaller slice• Best case scenario, the Pie gets bigger at a faster pace than

any of the inputs

Page 11: Production Possibility Frontiers/Curves

THE MULTIPLIER• A BETTER MOUSETRAP!!!

– Entrepreneurial Ability-• Changes in Technology and/or Practices can shift

the Production Curve out to the right without any increase in the factors of production

• Examples- – Agricultural Revolution- Better Crop Yields with mutated

seeds– CAD/CAM allows faster production of architectural

projects– Assembly Line – Specialization allowed Henry Ford to

build better cars at a lower cost

Page 12: Production Possibility Frontiers/Curves

Opportunity Cost and Specialization and Henry Ford

• The Production Possibility Curve measures the Trade Off in Choosing making one good versus making another

• 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.

Page 13: Production Possibility Frontiers/Curves

Pushing the Envelope

• The faster the PPC pushes out the faster growth takes place

• All countries seek to increase their PPC• The measurement of a country’s

Production in a given year is called GDP• GDP stands for Gross Domestic

Production

Page 14: Production Possibility Frontiers/Curves

GDP (to be studied later) • GDP= C + I +G + (x-m)• C= Consumption• I= Investment• G=Government Spending• X= Exports• M= Imports• The US GDP for 2004 was appr. $11 Trillion• Per Capita GDP in the US is appr. $37,000.00

Page 15: Production Possibility Frontiers/Curves

Rule of 72

• The US GDP grows at approx. 3% rate• The Rule of 72 is a quick way to determine

how fast a number doubles• 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

years• 72/3=24

Page 16: Production Possibility Frontiers/Curves

Fast Growth v. Slow Growth

• THE WONDERS OF COMPOUND INTEREST

• $100 invested at 2% over 40 years will become approx. $215.00

• $100 invested at 6% over 40 years will become approx. $1200.00 (note the interest rate is 3x 2% but the increase (215 to 1200) is almost 6x!!!)

Page 17: Production Possibility Frontiers/Curves

Pro Growth 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

• What those policies are is debatable– Infant industry (Alexander Hamilton)– MITI (Japan’s policy in the 70s and 80s)– Internet, Interstate and Velcro None created by Al

Gore but all created by the US Govt.

Page 18: Production Possibility Frontiers/Curves

Throwing a Curve in

• The PPC- Where the “C” comes from– The PPC is not a Linear Curve but a Convex

Curve

cars

tomatoes

So Who Cares???Remember Linear Curves have a constant slopeThis means the Opportunity Cost or Trade off by making one good instead of another is also constant- The Slope = The Trade Off

A Curve has a constant changing slope

This means the opportunity cost is constantly changing

Page 19: Production Possibility Frontiers/Curves

The Constantly Changing Slope• AT THE TOP OF THE CURVE 1 CAR IS VERY

EXPENSIVE. BY GIVING UP THE PRODUCTION OF ONE CAR SEVERAL TOMATOES CAN BE GROWN

• At THE BOTTOM 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

• WHY????

Page 20: Production Possibility Frontiers/Curves

BACK TO THE FACTORS OF 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?

Page 21: Production Possibility Frontiers/Curves

RATIONAL THOUGHTS

• 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.

• 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

Page 22: Production Possibility Frontiers/Curves

Rational Thoughts II• If we are only making cars, the first land

used to grow tomatoes will be the best land available. Therefore the first tomatoes made will be made at the least cost.

• 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

Page 23: Production Possibility Frontiers/Curves

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 other position. One society might like lots of tomatoes, another lots of cars

• Remember all points on the Curve are Production at 100% efficiency


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