Transcript Lecture Series 12: Production Possibilities

Production Possibilities
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Production Possibilities
While in school, you allot yourself a
certain period of time to study.
A. Given a 70 hour week ( 7 days, 10
hours a day), you can
1. study all the time = possibly a
very dull person
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Production Possibilities
2. play all the time = possibly a very
ignorant person
3. do both, one at the expense of the
other alternative such that:
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Production Possibilities
a. You are a well rounded person.
b. You are a little dull at a party, but
you are all right.
c. You are a little ignorant at a party,
but you are all right.
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The Study:Work Tradeoff
B. Assume that you are only taking two
courses: Livestock Management and
Agricultural Economics.
1. Also assume that you have a part
time job, and only have 10 hours a
week allotted to study for both
subjects outside of class.
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The Study:Work Tradeoff
2. Your grade in each course will be a
function (dependent upon) of how
many hours you study each subject.
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The Study:Work Tradeoff
3.Assume if you study:
0 hrs for economics: get F in econ. , A in
livestock
2.5 hrs for economics: get D in econ., B in
livestock
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The Study:Work Tradeoff
5.0 hrs for economics: get C in econ., C in
livestock
7.5 hrs for economics: get B in econ., D in
livestock
10.0 hrs for economics: get A in econ., F in
livestock
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A picture of the trade off above
would look like this:
E(grade)
Livestk.
10 hrs
10 hrs
E(grade) Econ
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The graph above was prepared
from the following data set.
X
(hrs on econ)
(F) 0
(D) 2.5
(C) 5.0
(B) 7.5
(A) 10.0
Y
(hrs on lstk)
10.0 (A)
7.5 (B)
5.0 (C)
2.5 (D)
0
(F)
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Now assume you cut back on
work and you now have 20 hrs
a week to study, what will happen ?
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E(grade)
Livestk.
10 hrs
10 hrs
E(grade) Econ
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20 hrs
E(grade)
Livestk.
10 hrs
20 hrs
10 hrs
E(grade) Econ
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THE PRODUCTION
POSSIBILITIES CURVE:
Lets look at an economy and break down
the commodities into two commodity
groups.
1. Agricultural goods & services
2. Non-agricultural goods & services
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THE PRODUCTION
POSSIBILITIES CURVE:
Lets make some initial assumptions
associated with the PPC
1.
2.
3.
4.
All resources are utilized and are fixed.
Technology is not changing.
Resources are not perfectly mobile.
There are only two commodities.
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We can now illustrate the PPC
curve:
$ of Ag. Goods
per year
unattainable
attainable
production frontier
$ Non-Ag. goods per year16
The PPC Curve
 Vertical
axis = $ value of agricultural
goods & services produced per year.
 Horizontal
axis = $ value of non-ag.
goods & services produced per year.
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The PPC Curve
$
value = the sum of the price of each
commodity produced times the
quantity of each commodity produced.
 In
our example, the $ value of ag. goods
+ $ value of non-ag goods equals gross
domestic product (GDP).
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The PPC Frontier
The PPC frontier shows all the
combinations of the two commodities
that can just be produced if all
resources are fully employed with the
technology currently available.
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The PPC curve illustrates 3 concepts:
(assuming resources are fully employed)
Scarcity: This is shown by the
unattainable points.
Choice: Any of the attainable points are
possible.
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The PPC curve illustrates 3 concepts:
(assuming resources are fully employed)
Opportunity cost:
This is due to the downward slope of the
production possibilities curve. i.e. To
get more non-agricultural goods, you
must give up some agricultural goods.
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An explanation of the negative
slope of the PPC:
The PPC is bowed out, and slopes down
because of the
LAW OF INCREASING COSTS: The
more of one good the economy
produces, the greater the amount of
other goods that must be given up
(opportunity cost increases at an
increasing rate).
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Law of Increasing Costs
$ Ag.
4
3
2
1
$ Non- Ag.
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Law of Increasing Costs
$ Ag.
4
As we increased the dollar value
of ag. goods and services produced
from 3 to 4 units, we had to
sacrifice this dollar value of
non-ag. goods and services.
3
2
1
$ Non- Ag.
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Why do costs increase as more
and more of one commodity is
produced ?
 Resources
are not easily adaptable to all
types of production. (Not Perfectly
mobile!!)

It costs more and more to shift not so
adaptable non-ag. resources into
agricultural production, or visa-versa.
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Economic Growth
Over time, we would like to see the PPC shift
outward.
When the PPC shifts outward, the economy has
grown and our standard of living is often
enhanced.
An outward shifting PPC over time
illustrates the ECONOMIC GROWTH you
here about all the time on TV, and read about
in the newspaper.
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What can cause the PPC to shift ?
 Remember
the initial assumptions we
made ? They were somewhat
constraining, lets begin to relax them.
 Remember
we assumed that technology
and the amount of available resources
were fixed or held constant.
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Improved Technology
 An
advancement in technology means
more goods and services can be
produced with the SAME amount of
available resources (PE).
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$Ag Goods
Hybrid Corn Example
$Non-Ag
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$Ag Goods
Microcomputers
$Non-Ag
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Advances in technology allow us to
increase output with the same or a
lessor amount of inputs
What about increases in resources
themselves?
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The production possibilities curve shifts
right.
For example:
Increased labor force due to population
growth.
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$Ag Goods
Increased Labor Force
$Non-Ag
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A Little History:
Why did the Romans conquer the world
as they knew it?
Why did the U.S. allow so many people
to freely immigrate to this country in
the 18th, 19th and early in the 20th
century? Why did we expand to the
West coast?
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A Little History:
Why did Hitler blitzkrieg through
Europe in 1940?
Why did Sadam Hussein invade Kuwait
in August of 1990?
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Present Mix of Consumer and
Capital Goods:
The present mix of consumer and capital
goods can affect the future economic
growth of an economy.
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How will the present position on this
production possibilities curve affect the
$ Consumer Goods
Pt. A future postion of the $AG vs. $Non-AG
PPC? What if the current position is A?
Pt. B
Qty needed to
maintain Economy
$ Capital Goods
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Point A: The economy has lots of consumer
goods and little capital goods. The emphasis
is on the short run and not on the long run.
A large shift in the $Ag vs. $ Non-Ag
production possibilities curve would not be
expected. In this case, the economy will
have more Consumer good consumption
now than at point B, but future Consumer
good consumption will be less.
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$Ag.
If the investment in capital is less than
the depreciation of capital, the PPC
could shift inward.
PPC97
PPC95
$ Non-Ag.
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Point B: The economy has lots of capital
goods and little consumer goods. The
emphasis is on the long run and not on the
short run. A large shift in the $Ag. vs.
$Non-Ag. production possibilities is
possible. In this case, the economy will
have less present Consumer good
consumption now than at point A but future
Consumer good consumption will be more.
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$ Consumer Goods
Pt. A
Pt. B
Qty needed to
maintain Economy
$ Capital Goods
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$Ag.
In this case, the economy invests heavily in
productive capital so it is possible to have
lots more Ag and Non-Ag consumer goods
in the future.
PPC97
PPC95
$ Non-Ag.
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DETERMINANTS of the PPC.
1. Quantity of resources (FOP's) available for
society to utilize.
a. If resources increasedoutput is
increased c.p.
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2.Improvements in Physical efficiency (New
Technology!, Enhanced Productivity!)
a. increase (units of output / units of input)
b. If resources are currently fixed, this is one
way to shift the PPC outward to achieve
economic growth.
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3.The current mix of capital and consumer good
production.
a. If we increase capital good production
relative to consumer good productionthis
increases one of the FOP's (capital) this
increases potential future output.
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b. This is the primary reason for
investment tax credits and capital
gains tax rates.
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4. Mobility of resources:
a. If we increase (improve) the mobility
of resources between the production of
different commodities,
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-- We decrease the opportunity cost of
moving resources from the production
of one commodity to the production of
another. We take some of the “bow”
out of the PPC curve.
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$ Ag
b. By reducing the opportunity cost,
the potential output of both
commodities is increased.
$ Non-Ag
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c. Our economy is more resilient to
changes in world economic conditions,
--resources are more quickly reemployed if displaced from the
production of a particular
commodity,
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--temporarily unemployed resources
are more efficient when re-employed in
the production of alternative
commodities.
--less training or modification is
required, therefore their is a lower cost
of re-allocating these resources.
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d. Which of the four categories of the
FOP's is our society most concerned
with in the short-run ?
-LABOR
-ENTREPRENEURSHIP OR
MANAGEMENT
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When these two human resources are
unemployed, the social costs are
enormous.
(Circular Flowdecreased disposable
incomedecreased demand)
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e. HOW do we make these two FOP's
more MOBILE ?
--increase the educational and
technical skills level of our society!!!
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PRACTICAL AND PERSONAL
APPLICATION OF THESE CONCEPTS:
There is a trade off between investment in
education and current consumption. As you
invest more in education, your current
consumption decreases but your future
consumption will likely increase. The
relationship between your current investment
in education and your future consumption
can be shown with production possibilities
curves.
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Academics vs. Leisure
Hrs. of Academics
16
Pt. A
Pt. B
16
Hrs. of Leisure
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Basic Wants vs. Other Wants
with Your H.S. Diploma
$Basic Wants
PPCHS
$ Other Wants
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What Are Basic Wants?
 Single
wide mobile home?
 An old used vehicle?
 Potatoes and Macaroni and Cheese?
 Clothes from the Factory Seconds Store?
 ????????
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What Are “Other Wants”
A
2000 or 3000 sq.ft. home with an acre?
 A new vehicle to drive?
 Rib eye and T-bone steaks? Shrimp?
 Fashionable Clothing (Carhart’s)?
 A vacation at the beach or mountains?
 Going out for dinner?
 Affording hobbies and recreation?
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Academics vs Liesure
Hrs. of Academics
16
Pt. A
Pt. B
16
Hrs. of Leisure
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“Choosing Point B”
Point B represents lots of Leisure now
and little investment in Academics
(education) now.
In this case, the PPC for Basic Wants and
Other Wants may not shift out very
much (if any) relative to the PPC with a
H.S. diploma!
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“Choosing Point B”
$Basic Wants
PPCB
PPCHS
$Other Wants
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Academics vs Liesure
Hrs. of Academics
16
Pt. A
Pt. B
16
Hrs. of Liesure
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“Choosing Point A”
Point A represents lots of investment in
Academics (education) now, and little
consumption of Leisure now.
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“Choosing Point A”
$Basic Wants
PPCA
PPCHS
$Other Wants
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The Choice is Yours!
The outcome of choosing Point A or Point
B is based on the progress made in the
same amount of time.
Its your free and independent choice of
which point on the Academic vs.
Leisure PPC to be on!
Which will you choose?
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