Write This Down Production Possibilities Frontier.

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Production Possibilities Frontier

Thomas Carlyle

DismalScience

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Production Possibilities Frontieraka PP CurveDefinition: diagram representing the maximum amount of goods/services an

resources are used.economy can produce when all of its

Product1

Product 2

This curve represents the maximum amount of twogoods a society or business can make using all of their available resources efficiently.

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Slacker

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Production Possibilities Frontieraka PP CurveDefinition: diagram representing the maximum amount of goods/services a

resources are used.economy can produce when all of its

It represents: Opportunity Cost● Trade offs = all alternative activities

opportunity cost = next highest valued

For a country or individual company, this model may show decision on how much of two products to produce.

show the investment choice between capital and consumer goods

Consumergoods

Capitalgoods

Tivos

ipods

Or….

CapitalGoods

Consumer Goods

= Human Made resources used to produce goods and services

goods intended for final use by consumers

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Production Possibilities Frontieraka PP CurveDefinition: diagram representing the maximum amount of goods/services a

resources are used.economy can produce when all of its

It represents: Opportunity Cost● Trade offs = all alternative activities

opportunity cost = next highest valued

Capital Goods = Human made resources

i.e. production tools, machines, equipmentused to produce goods and services

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nCapital Goods = Human made resources

i.e. production tools, machines, equipmentused to produce goods and services

Consumer Goods = goods intended for final

i.e. ipod, xbox, french fries, etc.use by consumers rather than businesses

CapitalGoods

Consumer Goods

Points on the curve are CHOICES

CapitalGoods

Consumer Goods

Points on the curve are CHOICES

CapitalGoods

Consumer Goods

Points on the curve are CHOICES

0

100

100

90

40

70

6000

CapitalGoods

Consumer Goods

Points on the curve are CHOICES

Which pointYou choose depends on your goals

0

100

100

90

40

70

6000

CapitalGoods

Consumer Goods

Some choices will move the entire curve

If you make more capital goods, you can use them in the future to make more consumer goods, you will be capable of producing more

You must make yourself worse offin the short run,

to make yourself better offin the long run.

You must make yourself worse offin the short run,

to make yourself better offin the long run.

http://www.bradyworld.com/cover/minnow.jpg

The ship set ground on the shore of this uncharted desert isle

With Gilligan, the Skipper too, the millionaire and his wife..

the movie star,the professor &MaryAnn

Here on..

Gilligan and the Skipper had to eat….

The 1st day, they spent 6 hours fishing

But, only caught one fish…

On the 2nd day, the Skipper went to fish again..

http://www.tasaday.com/images/_sl-003.jpg

http://www.coracle-fishing.net/corac-pix2/net-11x.jpg

Gilligan decided to not eat

Instead he collected vines

The 3rd day he was VERY hungry, but instead of eating he made nets from the vines…

http://www.tasaday.com/images/_sl-003.jpg

http://www.coracle-fishing.net/corac-pix2/net-11x.jpg

http://www.surfingforlife.com/g/cult_b10.jpg

Gilligan decided to not eat

Instead he collected vines

On the 4th day, nearly starving… he used his net

http://www.zeroimpactproductions.com/seine-over-freezer.jpg

He caught so many fish that he could spend more time doing other things…

http://www.riveroflifefarm.com/images/lodging/th/th2/tree-house-summer.jpg

If the PP shifts outward

This is GOOD!= economic growth

CapitalGoods

ConsumptionGoods

CapitalGoods

ConsumptionGoods

If the PP shifts inward

This is BAD!!= economic decline

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nCapital Goods = Human made resources

i.e. production tools, machines, equipmentused to produce goods and services

Consumer Goods = goods intended for final

i.e. ipod, xbox, french fries, etc.use by consumers rather than businesses

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nConsumer Goods = goods intended for final

i.e. ipod, xbox, french fries, etc.use by consumers rather than businesses

Economic Growth Economic Decline

Lets start with the good…

CapitalGoods

ConsumptionGoods

Five Variables that Shift the PP Outward:

1. Increase the productive labor force (# or productivity).

The parents of the baby boomers increased their future productive labor force by having a LOT of babies

New regulations/methods can increase employee productivity

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nConsumer Goods = goods intended for final

i.e. ipod, xbox, french fries, etc.use by consumers rather than businesses

Economic Growth Economic Decline

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nEconomic Growth Economic Decline

5 Shifters - things that will move curve out1. Increase the productive labor force (# or productivity).

Five Variables that Shift the PP Outward:

1. Increase the productive labor force (# or productivity).

2. Increase the quantity and quality of natural resources.

A company could find a new mine, or get to a more pure vein…

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n5 Shifters - things that will move curve out

1. Increase the productive labor force (# or productivity).2. Increase the quantity and/or quality of natural resources.

Five Variables that Shift the PP Outward:

1. Increase the productive labor force (# or productivity).

2. Increase the quantity and quality of natural resources.3. Increase the quantity and quality of capital.

A farming company could purchase more or better equipment

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n5 Shifters - things that will move curve out

1. Increase the productive labor force (# or productivity).2. Increase the quantity and/or quality of natural resources.3. Increase the quantity and/or quality of capital.

Five Variables that Shift the PP Outward:

1. Increase the productive labor force (# or productivity).

2. Increase the quantity and quality of natural resources.3. Increase the quantity and quality of capital.

4. Increase health and education.

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n5 Shifters - things that will move curve out

1. Increase the productive labor force (# or productivity).2. Increase the quantity and/or quality of natural resources.3. Increase the quantity and/or quality of capital.4. Increase health and education.

Five Variables that Shift the PP Outward:

1. Increase the productive labor force (# or productivity).

2. Increase the quantity and quality of natural resources.3. Increase the quantity and quality of capital.

4. Increase health and education.

5. Increase technology.

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n5 Shifters - things that will move curve out

1. Increase the productive labor force (# or productivity).2. Increase the quantity and/or quality of natural resources.3. Increase the quantity and/or quality of capital.4. Increase health and education.5. Increase technology.

The opposite is also true…

Capital

Consumption

Japan 1941

What capital goods did Japanproducein 1940?

umbrellasfor cocktaildrinks

What consumptiongoods did it produce?

rice

What did Japan do on December 7, 1941 ?

Capital

Consumption

Japan 1945

umbrellasfor cocktaildrinks

rice

What did the U.S. do toJapan for this dirty deed?

http://www.nhc.rtp.nc.us:8080/tserve/nattrans/ntimages/hiroshima.jpg

http://www.archives.gov/digital_classroom/history_day/bright_ideas/images/nagasaki.gif

Hiroshima

Nagasaki

morning of August 6, 1945

11:02 am, August 9, 1945

Capital

Consumption

Japan 1945

What do you think happenedto Japan’s productive labor force?

Capital

Consumption

Japan 1945

What do you think happenedto the quantity and quality of its natural resources?

Capital

Consumption

Japan 1945

What do you think happened tothe quantity and quality of its capital stock?

Capital

Consumption

Japan 1945

What do you think happened toits health and education?

http://hiroshima.tomato.nu/image/park_ma/e11-10.jpg

Capital

Consumption

Japan 1945

What do you think happened toits technology?

Capital

Consumption

Japan 1945

What happened to Japan’sPP?

CapitalGoods

ConsumptionGoods

Developed countries produce capital goods

Undeveloped countries produce consumption goods (i.e. food)

http://www.ellsworthamerican.com/archive/news2000/08-24-00/news3_08-24-00b.gif

CapitalGoods

ConsumptionGoods

Ethiopia

Prod

uce

Con

sum

e

= Starve

CapitalGoods

ConsumptionGoodsEthiopia

CapitalGoods

ConsumptionGoodsEthiopia

We sent food and $ which just prolonged the problem.

Solution: send capital goods insteadReality: we sent trackers, but forgot to send gas

CapitalGoods

ConsumptionGoods

Iraq

Oil

Sand?

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n5 Shifters - things that will move curve out

1. Increase the productive labor force (# or productivity).2. Increase the quantity and/or quality of natural resources.3. Increase the quantity and/or quality of capital.4. Increase health and education.5. Increase technology.

A decrease in any would have opposite effect, It would shift curve inward.

Guns

Butter

Military

Consumption goods

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The Advantages

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The Advantages

Absolute AdvantageOne entity can produce something absolutely faster than or greater than another entity.

Comparative AdvantageOne entity can produce something at a LOWER MARGINAL OPPORTUNITY COST than another entity.

Rum Rum

Crystal Crystal1 million

100,000

700,000

30,000

AB

0

C

80,000

40,000

0 40,000 80,000

Ireland Puerto Rico

A

B

C

Crystal Rum Crystal RumABC

1 million 0700,000 30,000 0 100,000

ABC

80,000 040,000 40,000 0 80,000

Rum Rum

Crystal Crystal

1 million

100,000

700,000

30,000

AB

0

C

80,000

40,000

0 40,000 80,000Ireland Puerto Rico

A

B

C

IRELAND

PRODUCE

1 Million Crystal0 Rum

TRADE-175,000+35,000

CONSUME825,00035,000

ON THEIR OWN

700,00030,000

ADDITIONAL W/ SPECIALIZATION

& TRADE

+125,000+5,000

--

==

PUERTO RICO

0 Crystal80,000 Rum

+175,000-35,000

175,00045,000

40,00040,000

+135,000+5,000-

-==

Rum Rum

Crystal Crystal1 million

100,000

700,000

30,000

A

B

0

C

80,000

40,000

0 40,000 80,000Ireland Puerto Rico

A

B

C35,000

825,000D

45,000

175,000 D

IRELAND

PRODUCE

1 Million Crystal0 Rum

TRADE-175,000+35,000

CONSUME825,00035,000

ON THEIR OWN

700,00030,000

ADDITIONAL W/ SPECIALIZATION

& TRADE

+125,000+5,000

--

==

PUERTO RICO

0 Crystal80,000 Rum

+175,000-35,000

175,00045,000

40,00040,000

+135,000+5,000-

-==

w/ trade

Which country is obviously better off through this specialization and trade?

Both Countries are!!!Both countries are now outside their own productioncapabilities. Through specialization and trade allparties are better off.

Rum Rum

Crystal Crystal1 million

100,000

700,000

30,000

A

B

0

C

80,000

40,000

0 40,000 80,000Ireland Puerto Rico

A

B

C35,000

825,000D

45,000

175,000 D

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The Advantages

Absolute AdvantageOne entity can produce something absolutely faster than or greater than another entity.

Comparative AdvantageOne entity can produce something at a LOWER MARGINAL OPPORTUNITY COST than another entity.* CA is used to decide who should produce what

Product1

Producti

vely E

fficie

nt

ON THE C

URVE =

CURVE =Inefficient or underused resources

INSIDE THE

Product 2

Lets discuss each part of the graph

PP CURVE

Inside the Curve = Not using all of your resources

Unemployment

Discrimination in hiring- Gender (ex: women in 1950’s)- Race- Religion

Unused Capital or technology (ex: laws, restrictions, bans)

Product1

Producti

vely E

fficie

nt

ON THE C

URVE =

OUTSIDE THE CURVE =Unattainable, can’t PRODUCE. But, can CONSUME via Specialization & Trade

CURVE =Inefficient or underused resources

INSIDE THE

Product 2

Lets discuss each part of the graph

PP CURVE

Product1

Producti

vely E

fficie

nt

ON THE C

URVE =

OUTSIDE THE CURVE =Unattainable, can’t PRODUCE. But, can CONSUME via Specialization & Trade

CURVE =Inefficient or underused resources

INSIDE THE

Product 2

Add this PP Graph to your notes

PP CURVE