Production Possibilities Curve (Frontier).ppt

productionpossibilities,whenfacedwithscarcityofresources,decisionshavetobemadeabouthowtousethoseresources,trade-offsopportunitycosts,trade-offs,thisisthedecisionmakingprocessthatisoccurringinyourmindrightnow!amigoingtopayattentiontowhatmr.haywardissaying,oramigoingtodaydream?amigoingtocometoclassorgobuyalotteryticket?amigoingtostayinschoolorgofindafulltimejob?eachandeverydecisionyoumakehasacost!notnecessarilyacostindollarterms,butacostinthatyoumustgiveupsomethinginordertogetmoreofsomethingelse.,opportunitycost,the“priceyoupay”foreachdecisionyoumakeiscalledtheopportunitycost.opportunitycostisvitaltotheunderstandingofeconomics.“theamountofaproductorservicethatmustbeforgone(givenup)inordertoobtainmoreofthenextbestalternativeproductorservice”,thebestwaytoillustratetrade-offsandopportunitycostsistouseaproductionpossibilitiescurve,theppcshowstherelationshipbetweentwogoods:1.capitalgoods(investmentgoods)goodsthatsatisfyourwantsindirectlyandpromotefuturegrowthor“happiness”delayedgratification.2.consumergoodsgoodsthatsatisfyourwantsdirectly.instantgratification,lesson1act1,productionpossibilitiescurve(frontier),constructingtheppc.horizontalaxisislabeled“consumergoods”verticalaxisislabeled“capitalgoods”,consumergoods,capitalgoods,productionpossibilitiescurve(frontier),ifthiseconomyallocatedallofitsproductiveresourcestotheproductionofcapitalgoodsitcouldproduce100capitalgoods,consumergoods,capitalgoods,0,100,productionpossibilitiescurve(frontier),ifthiseconomyallocatedallofitsproductiveresourcestotheproductionofconsumergoodsitcouldproduce1000consumergoods,consumergoods,capitalgoods,0,100,1000,productionpossibilitiescurve(frontier),connectthetwopoints.thislinerepresentsaneconomysproductionpossibilitiesofcapitalandconsumergoods.,consumergoods,capitalgoods,0,100,1000,productionpossibilitiescurve(frontier),noticethelineisstraight.ithasaconstantslope.letscalculatetheratiosbetweencapitalandconsumergoods.thisgivesusour“opportunitycosts”ofproducingcapitalandconsumergoods.,consumergoods,capitalgoods,0,100,1000,productionpossibilitiescurve(frontier),aneconomythatproducesallcapitalgoodsandnoconsumergoodsisaboringplacetobe.peoplewanttohavefun,andconsumergoodsmakelifeworthliving,consumergoods,capitalgoods,0,100,1000,productionpossibilitiescurve(frontier),inordertogetsomeconsumergoods,theeconomymustgiveuptheproductionofsomequantityofcapitalgoods.rememberallresourcesarelimited!,consumergoods,capitalgoods,0,100,1000,productionpossibilitiescurve(frontier),letsnumberouraxisandconnectthepoints.eachpointrepresentsproductionpossibilitiesforthiseconomy.,consumergoods,capitalgoods,0,100,1000,102030405060708090,100200300400500600700800900,.a,.b,.c,.d,.e,.f,.g,.h,.i,productionpossibilitiescurve(frontier),atpoint“a”wegiveuptheproductionof10capitalgoodsinordertoobtain100unitsofconsumergoods.,consumergoods,capitalgoods,0,100,1000,102030405060708090,100200300400500600700800900,.a,.b,.c,.d,.e,.f,.g,.h,.i,productionpossibilitiescurve(frontier),whatistheopportunitycostofproducingatpoint“a”?intermsofconsumergoods100consumergoods=10capitalgoods.1consumergood=10capitalgoods/1001consumergood=.10capitalgoodseachconsumergood“costs”onetenthofacapitalgood.iftheeconomywants1consumergood,itmustgiveuptheproductionof.10ofacapitalgood.“thisistheopportunitycostofconsumergoods”.,consumergoods,capitalgoods,0,100,1000,102030405060708090,100200300400500600700800900,.a,.b,.c,.d,.e,.f,.g,.h,.i,productionpossibilitiescurve(frontier),whatistheopportunitycostofproducingatpoint“a”?intermsofcapitalgoods10capitalgoods=100consumergoods.1capitalgood=100consumergoods/101capitalgood=10consumergoodseachcapitalgood“costs”tenconsumergoods.iftheeconomywants1capitalgooditmustgiveuptheproductionof10consumergoods.“thisistheopportunitycostofcapitalgoods”.,consumergoods,capitalgoods,0,100,1000,102030405060708090,100200300400500600700800900,.a,.b,.c,.d,.e,.f,.g,.h,.i,productionpossibilitiescurve(frontier),whatisthepracticalapplicationofthismodel?absoluteandcomparativeadvantage.formsthebasisforinternationaltrade.whocanproduce“absolutely”morerelativetoanothercountry.whocanproduceataloweropportunitycostrelativetoanothercountry.inotherwords,whohasthecomparativeadvantage.wewillexaminethislater!,consumergoods,capitalgoods,0,100,1000,102030405060708090,100200300400500600700800900,.a,.b,.c,.d,.e,.f,.g,.h,.i,comparativeandabsoluteadvantage,“dowhatyoudobestandtradefortherest”thiswasthewholepointofthesummerreading“thechoice:afableoffreetradeandprotectionism”comparativeadvantageisthe“round-aboutway”toproducegoodsandservices,comparativeadvantage,basicpremise:icouldbeateacherandgrowmyownfood.youcouldbeafarmerandhome-schoolyourchildren.ihaveacollegedegreeandaknackforteachingeconomicsbutitendtokillmostthingsigrow.youhaveagreenthumbandcangrowanything,butyouhateeconomics.whatarewetodo?,comparativeadvantage,weshouldspecializeinwhatwedobestandtradewitheachother.todeterminewhatwearebestatdoing,weneedtoconsiderouropportunitycosts.wewanttospecializeintheactivitythatisleastcostlytousintermsofopportunitycosts.,assumecountry“a”utilizesallofitsproductiveresources(productiveefficiency)toproduceeitherclothorwine.ifitallocatesallitsresourcestotheproductionofclothitcanproduce10yardsorcloth.ifitallocatesallitsresourcestotheproductionofwineitcanproduce15gallonswine,country“a”,country“b”,cloth,wine,cloth,wine,assumecountry“b”utilizesallofitsproductiveresources(productiveefficiency)toproduceeitherclothorwine.ifitallocatesallitsresourcestotheproductionofclothitcanproduce20yardsorcloth.ifitallocatesallitsresourcestotheproductionofwineitcanproduce20gallonswine,10,15,20,20,country“a”,country“b”,cloth,wine,cloth,wine,10,15,20,20,whichcountryhastheabsoluteadvantageintheproductionofcloth?(whocan“absolutely”producemorecloth?)whichcountryhastheabsoluteadvantageintheproductionofwine?(whocan“absolutely”producemorewine?),country“a”,country“b”,cloth,wine,cloth,wine,10,15,20,20,whichcountryhasthecomparativeadvantageintheproductionofcloth?(whocanproduceatthelowestopportunitycost,orinotherwords,whogivesuptheleastintermsofproductionoftheothergood.,country“a”,country“b”,cloth,wine,cloth,wine,10,15,20,20,lowestopportunitycostdeterminescomparativeadvantage,clothopportunitycostwineopportunitycostcountry“a”1010cloths=15wines1515wines=10clothsoror1cloth=15cloths/101wine=10cloths/15oror1cloth=1.5wines1wine=.67clothscountry“b”2020cloths=20wines2020wines=20clothsoror1cloth=20wines/201wine=20cloths/20oror1cloth=1wine1wine=1cloth,whohasthecomparativeadvantageintheproductionofcloth?,country“a”,country“b”,cloth,wine,cloth,wine,10,15,20,20,lowestopportunitycostdeterminescomparativeadvantage,clothopportunitycostwineopportunitycostcountry“a”1010cloths=15wines1515wines=10clothsoror1cloth=15cloths/101wine=10cloths/15oror1cloth=1.5wines1wine=.67clothscountry“b”2020cloths=20wines2020wine=20clothsoror1cloth=20wines/201wine=20cloths/20oror1cloth=1wine1wine=1cloth,whohasthecomparativeadvantageintheproductionofwine?,country“a”,country“b”,cloth,wine,cloth,wine,10,15,20,20,bottomlinecountry“b”hastogiveup1clothwhentheyproduce1wine,butcountry“a”hastogiveup1.5clothstoproduce1wine.country“b”hastogiveuplessrelativetocountry“a”toproducecloth.country“b”shouldspecializeintheproductionofcloth.country“a”hastogiveup.67winewhentheyproduce1cloth,butcountry“b”hastogiveup1winetoproduce1cloth.country“a”hastogiveuplessrelativetocountry“b”toproducewine.country“a”shouldspecializeintheproductionofwine.,lowestopportunitycostdeterminescomparativeadvantage,comparativeadvantage,whoshouldexportcloth?whoshouldimportcloth?whoshouldexportwine?whoshouldimportwine?,comparativeadvantage“termsoftrade”,wehaveestablishedthatnationsshouldproducethegood/servicethattheyhavethecomparativeadvantagein.howdowethentrade?wehavetodeterminewhatareacceptable“termsoftrade”simplywhatistheprice,country“a”,country“b”,cloth,wine,cloth,wine,10,15,20,20,lowestopportunitycostdeterminescomparativeadvantage,clothopportunitycostwineopportunitycostcountry“a”101cloth=1.5wines151wine=.67clothscountry“b”201cloth=1wine201wine=1cloth,country“a”specializesandproduces15winescountry“b”specializesandproduces20clothsifcountry“a”wantssomecloththeymustgiveupsomewineifcountry“b”wantssomewinetheymustgiveupsomeclothwhatareacceptabletermsoftradetoclosethisdeal!,country“a”,country“b”,cloth,wine,cloth,wine,10,15,20,20,lowestopportunitycostdeterminescomparativeadvantage,clothopportunitycostwineopportunitycostcountry“a”101cloth=1.5wines151wine=.67clothscountry“b”201cloth=1wine201wine=1cloth,letssay“a”trades2wineswith“b”for4clothsnow“a”consumes13winesand4clothsisthisagooddealfor“a”?graphandsee!termsoftradeinthiscase2wines=4cloths1wine=2cloths,13,5,4,7.5,10,10,letssay“b”trades4clothwith“a”for2winesnow“b”consumes16clothsand2winesisthisagooddealfor“b”?graphandsee!termsoftradeinthiscase4cloths=2wines1cloths=.5wines,16,2,baddealforcountry“b”notrade!,“a”produceswine,“b”producescloth,country“a”,country“b”,cloth,wine,cloth,wine,10,15,20,20,lowestopportunitycostdeterminescomparativeadvantage,clothopportunitycostwineopportunitycostcountry“a”101cloth=1.5wines151wine=.67clothscountry“b”201cloth=1wine201wine=1cloth,letssay“a”trades5wineswith“b”for4clothsnow“a”consumes10winesand4clothsisthisagooddealfor“a”?graphandsee!termsoftradeinthiscase5wines=4cloths1wine=.8cloths,5,7.5,10,10,letssay“b”trades4clothwith“a”for5winesnow“b”consumes16clothsand5winesisthisagooddealfor“b”?graphandsee!termsoftradeinthiscase4cloths=5wines1cloths=1.25wines,“a”produceswine,“b”producescloth,10,16,4,5,tradeshouldoccur!bothnowconsumebeyondtheirppcs!,productionpossibilitiescurve(frontier),thisstraightlineppcrepresents“constantopportunitycosts”thetrade-offaswemovealongtheppcareconstant,consumergoods,capitalgoods,0,100,1000,102030405060708090,100200300400500600700800900,.a,.b,.c,.d,.e,.f,.g,.h,.i,productionpossibilitiescurve(frontier),whatisthepracticalapplicationofthismodel?wewanttousethismodeltoexamineanindividualeconomymoreclosely.theppcisgoingtogothroughchangesfirstyoudidntthinkitwasgoingtobethateasy,didyou?,consumergoods,capitalgoods,0,100,1000,102030405060708090,100200300400500600700800900,.a,.b,.c,.d,.e,.f,.g,.h,.i,productionpossibilitiescurve(frontier),acloserlookatanindividualeconomyisgoingtogivedifferentlooktotheppc.itisnotgoingtobeastraightline.itisgoingtohavea“bowed”look.itisgoingtobeconvexfromtheorigin.,consumergoods,capitalgoods,0,100,1000,102030405060708090,100200300400500600700800900,productionpossibilitiescurve(frontier),thereasontheppcisbowedisbecauseofincreasingopportunitycosts.atpoint“a”theeconomygivesup10capitalgoodsinordertoget400consumergoods.400consumergoods=10capitalgoods1consumergood=10capitalgoods/4001consumergood=.025capitalgood,consumergoods,capitalgoods,0,100,1000,102030405060708090,100200300400500600700800900,.a,.b,.c,.d,productionpossibilitiescurve(frontier),thereasontheppcisbowedisbecauseofincreasingopportunitycosts.atpoint“b”theeconomygivesup10capitalgoodsinordertoget200moreconsumergoods.200consumergoods=10capitalgoods1consumergood=10capitalgoods/2001consumergood=.05capitalgood,consumergoods,capitalgoods,0,100,1000,102030405060708090,100200300400500600700800900,.a,.b,.c,.d,productionpossibilitiescurve(frontier),thebowednatureoftheppcisduetoincreasingopportunitycostsnotallresourcesareadaptabletoalternativeuses.resourcesusedforcapitalgoodsmaynotbesuitabletomakeconsumergoods(andviceversa)marshlandsuitableforgrowingricecouldnoteasilybeconvertedforuseasaanairport.itwouldbemuchmorecostlythanusingfarmlandinkansas.,consumergoods,capitalgoods,0,100,1000,102030405060708090,100200300400500600700800900,.a,.b,.c,.d,productionpossibilitiescurve(frontier),letstakeacloserlookattheppc.whatdothedifferentpointsontheppcrepresent?,consumergoods,0,100,1000,100200300400500600700800900,.a,.b,.c,.d,productionpossibilitiescurve(frontier),eachpointrepresentsproductiveefficiencythismeansthatthiseconomyisallocatingallofitproductiveresourcesintheleastcostlyway,consumergoods,0,100,1000,100200300400500600700800900,.a,.b,.c,.d,productionpossibilitiescurve(frontier),thereareaninfinitenumberofpointsontheppc.whereasocietydecidestoproduceiscalledallocativeefficiencythisrepresentsthecombinationofcapitalandconsumergoodsmostdesiredbythesociety,consumergoods,0,100,1000,100200300400500600700800900,.a,.b,.c,.d,productionpossibilitiescurve(frontier),thewholeppcrepresents“fullproduction”productiveefficiencyfull-employmentofresources,consumergoods,0,100,1000,100200300400500600700800900,.a,.b,.c,.d,productionpossibilitiescurve(frontier),doeconomysalwaysproduceontheppc?no!oftentheyoperateinsidetheirproductionpossibilities,consumergoods,0,100,1000,100200300400500600700800900,.a,.b,.c,.d,e,productionpossibilitiescurve(frontier),doeconomysalwaysproduceontheppc?point“e”representsapointinsidetheppc.noticethatthispoint“e”representsalowerbundleofcapitalandconsumergoods,consumergoods,0,100,1000,100200300400500600700800900,.a,.b,.c,.d,.e,productionpossibilitiescurve(frontier),doeconomysalwaysproduceontheppc?point“e”representsapointinsidetheppc.theareabetweenpoint“e”andtheppcrepresentsunderutilizationofresourcesorunder-employmentofresourcesorunemployment.theeconomyisbeinginefficient.,consumergoods,0,100,1000,100200300400500600700800900,.a,.b,.c,.d,.e,productionpossibilitiescurve(frontier),doeconomysalwaysproduceontheppc?point“e”representsapointinsidetheppc.thiseconomycouldbedoingbetter,consumergoods,0,100,1000,100200300400500600700800900,.a,.b,.c,.d,.e,productionpossibilitiescurve(frontier),doeconomysalwaysproduceontheppc?howaboutpoint“f”?pointfisoutsideourppcitrepresentsacombinationofcapitalandconsumergoodsthatiscurrentlynotpossiblewiththiseconomiesresources,consumergoods,0,100,1000,100200300400500600700800900,.a,.b,.c,.d,e,.f,productionpossibilitiescurve(frontier),doeconomysalwaysproduceontheppc?howaboutpoint“f”?pointfisoutsideourppcthispointisdesirable(more“stuff”)butcurrentlynotattainable.,consumergoods,0,100,1000,100200300400500600700800900,.a,.b,.c,.d,e,.f,productionpossibilitiescurvetheppcshowsallpossiblecombinationsoftwogoodsthatcanbeproducedifallavailableresourcesarefullyemployed(used)withthebesttechnologycurrentlyavailable,robotics(capitalgood),compactdiscs(consumergood),b,c,e,f,a,g,howdowegettopointg?1.technologicaladvancementwhichincreasesproductivity2.discovernewresources3.takeresources(war)4.tradeforresources,d,“oureconomyisdrivenbytechnologicaladvancement”,canyouthinkofanexampleinhistorywhenwewereinsidetheppc?,productionpossibilitiescurvetheppcshowsallpossiblecombinationsoftwogoodsthatcanbeproducedifallavailableresourcesarefullyemployed(used)withthebesttechnologycurrentlyavailable,robotics(capitalgood),compactdiscs(consumergood),b,c,e,f,a,g,howdowegettopointg?1.technologicaladvancementwhichincreasesproductivity2.discovernewresources3.takeresources(war)4.tradeforresources,d,“oureconomyisdrivenbytechnologicaladvancement”,canyouthinkofanexampleinhistorywhenwewereinsidetheppc?,possibilities-a,b,c,d,&e,impossibilitymore/betterreso