Production Possibility Frontiers/Curves

1. Production Possibility Frontiers/Curves

2. 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!

3. 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

4. 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

5. 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!!!

6. 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

7. The Curve as a Straight Line Linear Production Possibility Curve • Linear Curve • Constant Slope • Means that the trade off or opportunity cost remains standard throughout This area is Impossible w/out a change in the factors of production Cars 100% efficient inefficient Tomatoes

8. Getting Beyond the Curve A Change in any one of the Factors of Production will lead to a change in the PPC Increase in possible production of tomatoes due to increase of land labor or capital 100 Cars Decrease in possible production of tomatoes due to decrease of land labor or capital 0 100 11000 Tomatoes

9. 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

10. 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

11. 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

12. 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.

13. 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

14. 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

15. 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

16. 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!!!)

17. 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.

18. Throwing a Curve in The PPC- Where the “C” comes from The PPC is not a Linear Curve but a Convex Curve So Who Cares??? Remember Linear Curves have a constant slope This means the Opportunity Cost or Trade off by making one good instead of another is also constant- The Slope = The Trade Off cars A Curve has a constant changing slope This means the opportunity cost is constantly changing tomatoes

19. 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????

20. 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?

21. 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

22. 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

23. 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