Transcript Production Possibilities Frontier Outline I. Introduction to Gilligan’s Island A. Production Possibilities Table B.

Production Possibilities
Frontier
Outline
I. Introduction to Gilligan’s Island
A. Production Possibilities Table
B. Production Possibilities Frontier
II. Economic Concepts Illustrated with a PPF
A.
B.
C.
D.
Opportunity Cost
Scarcity
Productive Efficiency
Growth/Technology Change
Gilligan’s Island
• Recall that in the Gilligan’s TV show there
are seven people stranded on a desert island:
Gilligan, The Skipper, Maryanne, Ginger,
Mr and Mrs. Howell, and the Professor.
• Assume that they only produce two things huts (from Palm trees) and radios (from
coconuts)
Production Possibilities (per
month)
• If everyone is making huts they can produce
112 huts in one month and implicitly no
radios.
• Let’s say they figure that it’s probably a
good idea to make some radios. Who do
they ask to stop making huts?
Who?
The Professor
• Because he has been trained to do this and
is not all skilled in hut production.
• So now the crew can make 7 radios and 98
huts in a month.
• What if they want to make more radios who do they ask to do it?
Who Next?
• Whomever is next best at making radios
relative to making huts - let’s say that is
Maryanne.
• If Maryanne and the Professor are making
radios, then the crew can produce 13 radios
and 80 huts in a month.
Three Production Possibilities
• At this point we have three production
possibilities for the crew. One in which they
all make huts, one where all but the
Professor make huts, and one where the
Professor and Maryanne make radios and
the rest make huts.
• Let’s look at this information in a table.
Production Possibilities Table
• Production Possibilities Table - a table that
shows all combinations of goods and
services that can be produced given the
resources of society and the existing state of
technology
Production Possibilities Table
(Part I)
Huts
112
Radios
[The Whole Crew
Makes Huts]
0
98
[Professor Makes Radios
The Rest Make Huts]
7
80
[Professor and Maryanne
Make Radios, The Rest
Make Huts]
13
The Rest of the Crew
• Now, let’s consider what would happen if,
one by one, the rest of the crew moved into
radio production from hut production.
• Remember -- you want to take the people
who are best at making radios and not very
good at making huts out of hut production
and put them in radio production first.
Who Next?
• First the Mr. Howell, then Mrs. Howell,
then Ginger, then The Skipper, and lastly of course would be Gilligan, since he is
probably the worst at making radios.
• Let’s see how we might include each of
these production possibilities in our table.
Production Possibilities Table
(Complete)
Huts
Radios
112
0
98
7
80
13
60
18
40
22
22
25
8
0
27
28
Production Possibilities Frontier
• This table let’s us know how much our
island economy can produce. Now, let’s try
to get a graphical sense of these
possibilities.
• To do this we to measure the quantity of
each good on the x and y axes.
Production Possibilities Frontier
Quantity of Huts
Quantity of Radios
Production Possibilities Frontier
Huts
120
90
60
30
0
7
14
21
28 Radios
Production Possibilities Frontier
Huts
120
90
This is the first line in
the table - where there
are no radios and 112
huts produced
60
30
0
7
14
21
28 Radios
Production Possibilities Frontier
Huts
120
90
This is the second line in
the table - where there
are 7 radios and 98
huts produced
60
30
0
7
14
21
28 Radios
Production Possibilities Frontier
Huts
These are all of the
production possibilities
from our table
120
90
60
30
0
7
14
21
28 Radios
Production Possibilities Frontier
Huts
When we connect the points
we have the “Production
Possibilities Frontier”
120
90
60
30
0
7
14
21
28 Radios
Production Possibilities Frontier
Defined
Production Possibilities Frontier (PPF) - graph
that shows all combinations of goods and
services that can be produced given the
resources of society and the existing state of
technology
Assumptions made in using a
PPF
• There are only 2 goods in the economy
• Everything produced is consumed
• Resources and technology are held constant
Concepts Illustrated by the PPF
• Opportunity Cost
– Constant
– Increasing
• Scarcity
• Productive Efficiency
• Growth
Opportunity Cost
Opportunity Cost - the next best alternative
forgone when a resource is used.
“There is no such thing as a free lunch.”
Opportunity Cost in Gilligan’s
Island
• When The Professor makes 7 radios, he is
using his labor - a resource.
• That labor could have been used to make
something else, specifically, it could have
made 14 huts.
• Thus the opportunity cost of making the
first 7 radios is 14 huts.
Per Unit Opportunity Cost in
Gilligan’s Island
• If the opportunity cost of making 7 radios is
14 huts, then the opportunity cost of making
1 radio must be 2 huts.
• Most of the time when we are thinking
about opportunity cost, it is easier to think
of it in “per unit” terms. In other words, ask
yourself “what is the opportunity cost of
making one unit of a good or service?”
How to Find Per Unit
Opportunity Cost
A simple way to find the per unit opportunity
cost is to use the following equation:
Opportunity Cost of a
Good or Service Produced =
Units of Good or Service Forgone
Units of a Good or Serve Produced
Examples of Opportunity Cost on
Gilligan’s Island
• The Professor gave up making 14 huts for 7
radios. The opportunity cost of The
Professor making a radio is 14/7 = 2 huts.
• Maryanne gave up making 18 huts to
produce 6 radios. The opportunity cost of
Maryanne making a radio is 18/6 = 3 huts.
• We can also find the opportunity cost of
Maryanne making a hut = 6/18 = 1/3 of a
radio.
Opportunity Cost and the PPF
Huts
120
Amount of Huts
Given Up
90
Amount of
Radios Gained
60
30
0
7
14
21
28 Radios
Opportunity Cost and the PPF
Huts
120
90
Amount of Huts
Given Up
60
Amount of
Radios Gained
30
0
7
14
21
28 Radios
Opportunity Cost and the PPF
• We know that the opportunity cost of radios
is huts given up divided by radios gained.
• Graphically, that is the same thing as the
vertical change divided by the horizontal
change (if we ignore the negative sign). In
other words, the opportunity cost of making
a radio is the slope of the the PPF.
Increasing Opportunity Costs
If we compute the opportunity cost of making radios
for each member of the crew we find the
following opportunity costs:
Professor - 2
Maryanne - 3
Mister Howell - 4
Ginger - 5
Mrs. Howell - 6
The Skipper - 7
Gilligan - 8
Increasing Opportunity Cost
• Opportunity Cost increased because we
picked people who were best at radios to
make radios first. Then we kept choosing
the best radio maker from all of the hut
makers until we we left with the worst radio
maker, Gilligan.
Increasing Opportunity Cost
(Cont.)
This is because different parts of our economy
are better suited for making different things.
When starting to produce something we are
going to want to make it as cheaply as
possible. In other words - giving up as little
as possible of other things. That is why the
first person who makes radios is the
professor, since he has the lowest
opportunity cost of making radios.
Increasing Opportunity Cost
(Cont.)
Note that generally as we make more and
more of a good, the opportunity cost of
making it increases. This is called the “The
Law of Increasing Opportunity Cost.”
Constant Opportunity Cost
• If all of the crew are equally skilled at
making huts and radios, then there are
Constant Opportunity Costs
• This means that the slope of the PPF is
constant.
Constant Opportunity Cost
Huts
120
The opportunity cost of
making a radio is 6 huts.
This is true regardless of
what combination of
goods is produced.
90
60
30
0
7
14
21
28 Radios
Scarcity
Huts
120
90
Since we have scarce resources, i.e. only
7 people, we are limited in what we can
produce. We cannot make 60 huts and
28 radios.
60
30
0
7
14
21
28 Radios
Productive Efficiency
In order to be productively efficient, our
economy must not be able to produce more
of one good without producing less of
another. In other words, we must be on the
PPF. If we are inside of the PPF, we could
produce more of one good without
producing less of another.
Consider the 3 points on the following graph:
Productive Efficiency
Huts
120
90
60
A
B
C
30
0
7
14
21
28 Radios
Productive Efficiency
Point A cannot be productively efficient since
we can increase production of radios from 7
to 18 while still producing 60 huts.
Productive Efficiency (Cont.)
Point B is efficient since if we want to
increase production of radios from 18 to 28,
we must decrease our hut production from
60 to 0.
Productive Efficiency (Cont.)
Point C is unattainable, since no matter how
we juggle our resources, we cannot produce
that much. It is outside of our PPF.
Growth
We all remember the special Gilligan’s Island
movie where the Harlem Globetrotters’ (a
very cool basketball team) plane crashed on
the island. The episode involved a game for
control of the world, but that is another
story! For our purposes, let’s consider what
would happen to our PPF.
Growth (Cont.)
Now we have 10 more people who can
produce huts and radios. If we assume that
opportunity costs don’t change, then we can
model this as a shifting out of the PPF
Growth
Huts
120
New PPF
90
60
30
0
7
14
21
28
Radios
Changes in Technology
What if a book called “How to Make Radios
Out of Coconuts in Half the Time!” washes
up on shore? Everyone can now make
radios faster. This is a change in the
technology of radio production. While this
does not allow us to make more huts, we
can make more radios with the same
resources.
Technology Change
Huts
120
New PPF
90
60
30
0
7
14
21
28
Radios
Technology Change
• Note that the slope of the PPF changed implying the opportunity cost changed
• This is because it now takes less time to
make a radio, which means we are giving
up less huts each time we make a radio!
How Does This Apply to The
Real World?
Gilligan’s Island is not real (I am sorry to
say), but the lessons from it are very real.
• Our economy has thousands of goods, but
we have a PPF like the crew has except
instead of two axes for two goods, our PPF
has many more axes.
Real World (Cont.)
• Our economy has opportunity costs - a
recent article pointed out that all of the
money spent on new sports stadiums in the
last 5 years could refurbish every
elementary and secondary public school in
the country.
• Our economy has growth - when the
population grows or new resources are
discovered the PPF shifts out.
Real World (Cont.)
• Our economy faces technology changes when the assembly line was invented we
could make many goods faster. This moved
our PPF much in the same way as it did in
the example on Gilligan’s Island.