1. Econ 201 Modelling the Market
Production Possibilities Frontier (PPF) Curve
One Individual’s or Countries Production Capabilities

2. How People Make Decisions
Principle 1: People face trade-offs
Making decisions
Trade off one goal against another
Principle 2: The cost of something is what you give up to get it - each decision has an opportunity cost
Because people face trade-offs when making choices – you have to give something up to get something
Principle 3: Rational people think at the margin
Rational decision maker – take action only if
Marginal benefits > Marginal costs
Marginal Benefits – change (or increase) in total benefits from choice
Marginal Costs – change/increase in costs from choice (opportunity costs of “not chosen”)

3. Production Possibilities Frontier - Choice between producing 2 goods
Combinations of outputs that a society can produce if all of its resources are being used efficiently
Assumptions of this model
Technology fixed
Resources fixed
Simplified two-good analysis
Lecture notes:
The assumptions of the model help preserve ceteris paribus.
Our two goods are pizzas and wings.

4. Production Possibilities Frontier
Image: Animated Figure 2.1
Lecture notes:
Let’s begin by imagining a society that produces only two goods—pizzas and wings. This may not seem very realistic, since the entire economy is comprised of millions of different goods and services, but the benefit of this approach is that it allows us to understand the trade-offs in the production process without making the analysis too complicated.
The figure shows the production possibilities frontier for our two-product society. It is important to remember that the number of people and the total resources of this two-product society are fixed. If the economy uses all of its resources to produce pizzas, it can produce 100 pizzas and zero wings. If it uses all of its resources to produce wings, it can make 300 wings and zero pizzas. These outcomes can be found by locating points A and B on the production possibilities frontier. It is unlikely that the society will choose either of these extreme outcomes because it is human nature to enjoy variety.
At any combination of wings and pizzas along the production possibilities frontier, the society is using all its resources to be productive. These points are considered efficient because society is producing the largest possible output from its resources. But what about point F, and all the other points located in the purple shaded region? These points represent an outcome inside the production possibilities frontier and are, therefore, inefficient.
Whenever society is producing along the production possibilities frontier, the only way to get more of one good is to accept less of the other

5. Production Possibilities Frontier - Choice between producing 2 goods
Combinations of outputs that a individual/society can produce if all of its resources are being used efficiently
Lecture notes:
The assumptions of the model help preserve ceteris paribus.
Our two goods are pizzas and wings.

6. Why Trade – PPF Model of Trade
DEFINITION of 'Production Possibility Frontier - PPF' A curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently.
A production-possibility frontier is a budget constraint presented by the limitation of available factors of production.

7. Production Possibilities Frontier
Pizzas
Chicken W
Cost of +1 CW
Cost of +1 Pizza
100 -3 70 90
-0.33 50
150
300
Can’t Produce
Technology Constraint
Image: Animated Figure 2.1
Lecture notes:
Let’s begin by imagining a society that produces only two goods—pizzas and wings. This may not seem very realistic, since the entire economy is comprised of millions of different goods and services, but the benefit of this approach is that it allows us to understand the trade-offs in the production process without making the analysis too complicated.
The figure shows the production possibilities frontier for our two-product society. It is important to remember that the number of people and the total resources of this two-product society are fixed. If the economy uses all of its resources to produce pizzas, it can produce 100 pizzas and zero wings. If it uses all of its resources to produce wings, it can make 300 wings and zero pizzas. These outcomes can be found by locating points A and B on the production possibilities frontier. It is unlikely that the society will choose either of these extreme outcomes because it is human nature to enjoy variety.
At any combination of wings and pizzas along the production possibilities frontier, the society is using all its resources to be productive. These points are considered efficient because society is producing the largest possible output from its resources. But what about point F, and all the other points located in the purple shaded region? These points represent an outcome inside the production possibilities frontier and are, therefore, inefficient.
Whenever society is producing along the production possibilities frontier, the only way to get more of one good is to accept less of the other
Economically
Inefficient

8. PPF – Non-linear function
The production--possibility frontier (PPF) is an expository figure for representing scarcity, cost, and efficiency.

9. How People Interact Principle 5: Trade can make everyone better off
Specialization
Allows each person/country to specialize in the activities he/she does best
People/countries can buy a greater variety of goods and services at lower cost

10. A Parable for the Modern Economy
Two goods: meat and potatoes
Two people: rancher and farmer
If rancher produces only meat
And farmer produces only potatoes
Both gain from trade
If both rancher and farmer produce both meat and potatoes
They still gain from specialization and trade

11. The production possibilities frontier (a)1
The production possibilities frontier (a)
(a) Production Opportunities
Minutes needed to
Make 1 ounce of:
Amount produced in
8 hours
Meat
Potatoes
Farmer
Rancher
60 min/oz
20 min/oz
15 min/oz
10 min/oz
8 oz
24 oz
32 oz
48 oz
Panel (a) shows the production opportunities available to the farmer and the rancher.

12. The production possibilities frontier (b, c)1
The production possibilities frontier (b, c)
(b) The farmer’s production
possibilities frontier
(c) The rancher’s production
possibilities frontier
Meat (oz) 4 8
Meat (oz) 12 24
If there is no trade, the rancher chooses this production and consumption.
If there is no trade, the farmer chooses this production and consumption. B A
Potatoes (oz) 16 32
Potatoes (oz) 24 48
Panel (b) shows the combinations of meat and potatoes that the farmer can produce. Panel (c) shows the combinations of meat and potatoes that the rancher can produce. Both production possibilities frontiers are derived assuming that the farmer and rancher each work 8 hours per day. If there is no trade, each person’s production possibilities frontier is also his or her consumption possibilities frontier

13. The opportunity cost of meat and potatoes1
The opportunity cost of meat and potatoes
Opportunity cost of:
1 oz of Meat
1 oz of Potatoes
Farmer
Rancher
4 oz potatoes
2 oz potatoes
¼ oz meat
½ oz meat

14. A Parable for the Modern Economy
Specialization and trade
Farmer – specialize in growing potatoes
More time growing potatoes
Less time raising cattle
Rancher – specialize in raising cattle
More time raising cattle
Less time growing potatoes
Trade
Willing to trade: 3 oz of meat for 1 oz potatoes
Final trade -5 oz of meat for 15 oz of potatoes
Both gain from specialization and trade

15. Farmer’s Gains From Trade
Potatoes
Meat
No Trade
With 32 28 29 1 24 26 2 20 23 3 16 4 12 17 5 8 14 6 11 7

16. Rancher’s Gains From Trade

17. Greg’s Final Solution (text)2
Greg’s Final Solution (text)
(a) The farmer’s production
and consumption
(b) The rancher’s production
and consumption
Meat (oz) 4 8
Meat (oz) 12 24
Farmer's
production and
consumption
without trade
Rancher’s production with trade
Rancher’s production and consumption without trade
Farmer's
consumption
with trade 18 12 13 B* A* 27
Rancher’s consumption with trade B 5
Farmer's
production
with trade 17 A
Potatoes (oz) 16 32
Potatoes (oz) 24 48
Farmer and Rancher agree to trade 5 oz of Meat for 15 oz of Potatoes (3:1)
Start at corners (specialization)