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Production Possibilities Frontiers Rick Weber See also: http://www.rick-weber.com/EC101/tag/ppf/http://www.rick-weber.com/EC101/tag/ppf/

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What’s the big idea?! Thinking on paper with 2D graphs Ceteris paribus which means “all else equal” Law of diminishing marginal returns Marginal/Opportunity cost

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Disclaimer! There’s going to be a bit of jargon here Sometimes different terms describe the same phrase I usually use the “fancier” term out of habit. These are some big concepts that are central to economics! And we’re moving fast! Slides are online at Rick-Weber.com/EC101

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Welcome to the Cartesian Plane

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What is this 2D graph thing? Each axis represents some thing. Moving further along the axis indicates different quantities. Each point represents some combination of the two things. Pro Tip: Consider 2x2 tables. Bottom left: not much of either thing Top right: lots of both things Top left/Bottom right: lots of just one of the things A graph allows us to show relationships between the two things. Note that we are only changing these two variables (i.e. “everything else held equal”).

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Ceteris Paribus: All Else Equal This is one of the most important things you can take away from economics. This is a tool of thought experiments It’s much easier to think about changing two variables than changing all variables at once. Also, using the Latin makes you sound fancy!

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Draw a Budget Constraint On a piece of paper, draw a 2D graph that illustrates how much fish and/or coconuts you can afford. If you spent all of your money on coconuts, how many do you get? This is a point on the “coconut” axis. You can get the same point for fish axis. Connect these two points with a straight line.

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Buying Fish and Coconuts Fish costs $9.99 each Coconuts cost $3.33 each You have $50 FishCoconuts 50 43 36 29 112 015

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What if you didn’t buy fish/coconuts with cash? What does your budget constraint look like if you’re “buying” fish/coconuts with your own effort.

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Hunting/gathering Fish and Coconuts At the grocery store, it’s easy to get more fish or coconuts… just pay more. When you’re stranded on an island, some coconuts are laying on the ground, but others will be harder to find. FishCoconuts 50 410 316 219 121 022

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Preview! What if you could buy or produce? You could get more stuff by gathering coconuts, selling some, and using the proceeds to buy fish

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PPF – Production Possibilities Frontier A PPF illustrates the maximum combinations of products that can be produced with a given set of resources and talent Production: we’re looking at what we can produce Possibilities: we’re looking at what we can produce Frontier: we’re looking at the edge or maximum possible levels of production Simplifying assumption: we’re looking at just two goods

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Law of Diminishing Marginal Returns Defined Principle of diminishing value: “The more you have of a good [ceteris paribus] the less you value having a little more.” This is essentially the same thing as… LoDMR: “If you hold all inputs but one constant and increase that one, eventually its marginal product begins to decline.”

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Hunting/gathering Fish and Coconuts Some coconuts are laying on the ground, but some will be harder to find. However many coconuts you could gather in a day, the last one you find before giving up will be the hardest. FishCoconuts 50 410 316 219 121 022

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Economic growth! Over the last few days you’ve spent less time hunting/gathering so you could collect vines and make a net! What happens to your PPF? (discuss with the person next to you) FishCoconuts 50 410 316 219 121 022

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Economic growth! If you spend all your time gathering coconuts, the net is worthless. If you spend all your time fishing, the net is fantastic! FishCoconuts 100 8 616 419 221 022

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Law of Diminishing Marginal Returns The first coconut you collect will be the easiest one. If you decide to look for more, you will then start looking higher up trees. If you spend all your time gathering coconuts, you give up the chance to catch fish

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Tradeoffs FishCoconuts 50 410 316 219 121 022

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PPFs illustrate cost: What is the cost of the 3 rd fish? http://www.polleverywhere.com/ multiple_choice_polls/53o7uxEmF EPLcD4 http://www.polleverywhere.com/ multiple_choice_polls/53o7uxEmF EPLcD4 What is the cost of the 22 nd coconut? http://www.polleverywhere.com/ multiple_choice_polls/VfecyfjBBSF LosO http://www.polleverywhere.com/ multiple_choice_polls/VfecyfjBBSF LosO

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