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Production PossibilitiesProduction Possibilities

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Production PossibilitiesProduction Possibilities

While in school, you allot yourself a While in school, you allot yourself a certain period of time to study. certain period of time to study.

A. Given a 70 hour week ( 7 days, 10 A. Given a 70 hour week ( 7 days, 10 hours a day), you canhours a day), you can

1. study all the time = possibly a1. study all the time = possibly a

very dull personvery dull person

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Production PossibilitiesProduction Possibilities

2.2. play all the time = possibly a play all the time = possibly a veryvery

ignorant personignorant person

3.3. do both, one at the expense of do both, one at the expense of thethe

other alternative such that:other alternative such that:

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Production PossibilitiesProduction Possibilities

a. You are a well rounded person.a. You are a well rounded person.

b. You are a little dull at a party, butb. You are a little dull at a party, but

you are all right.you are all right.

c. You are a little ignorant at a c. You are a little ignorant at a party,party,

but you are all right.but you are all right.

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The Study:Work TradeoffThe Study:Work Tradeoff

B. Assume that you are only taking twoB. Assume that you are only taking two

courses: Livestock Management and courses: Livestock Management and

Agricultural Economics.Agricultural Economics.

1. Also assume that you have a part1. Also assume that you have a part

time job, and only have 10 hours a time job, and only have 10 hours a

week allotted to study for bothweek allotted to study for both

subjects outside of class.subjects outside of class.

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The Study:Work TradeoffThe Study:Work Tradeoff

2.2. Your grade in each course will Your grade in each course will be abe a

function (dependent upon) of function (dependent upon) of howhow

many hours you study each many hours you study each subject.subject.

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The Study:Work TradeoffThe Study:Work Tradeoff

3.3. Assume if you study:Assume if you study:

0 hrs for economics: get F in econ. , 0 hrs for economics: get F in econ. , A in livestockA in livestock

2.5 hrs for economics: get D in 2.5 hrs for economics: get D in econ., B in livestockecon., B in livestock

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The Study:Work TradeoffThe Study:Work Tradeoff

5.0 hrs for economics: get C in econ., 5.0 hrs for economics: get C in econ., C in livestockC in livestock

7.5 hrs for economics: get B in econ., 7.5 hrs for economics: get B in econ., D in livestockD in livestock

10.0 hrs for economics: get A in 10.0 hrs for economics: get A in econ., F in livestockecon., F in livestock

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A picture of the trade off A picture of the trade off above would look like this:above would look like this:

E(grade)E(grade)

Livestk.Livestk.

10 hrs10 hrs

10 hrs 10 hrs E(grade) EconE(grade) Econ

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The graph above was The graph above was prepared from the prepared from the following data set.following data set. X Y X Y

(hrs on econ) (hrs on lstk) (hrs on econ) (hrs on lstk)

(F) 0 10.0 (A) (F) 0 10.0 (A)

(D) 2.5 7.5 (B) (D) 2.5 7.5 (B)

(C) 5.0 5.0 (C) (C) 5.0 5.0 (C)

(B) 7.5 2.5 (D) (B) 7.5 2.5 (D)

(A) 10.0 0 (F) (A) 10.0 0 (F)

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Now assume you cut back Now assume you cut back on work and you now have on work and you now have 20 hrs20 hrsa week to study, what will happen ? a week to study, what will happen ?

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E(grade)E(grade)

Livestk.Livestk.

10 hrs10 hrs

10 hrs 10 hrs E(grade) EconE(grade) Econ

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E(grade)E(grade)

Livestk.Livestk.

10 hrs10 hrs

10 hrs 10 hrs E(grade) EconE(grade) Econ

20 hrs

20 hrs

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THE PRODUCTION THE PRODUCTION POSSIBILITIES CURVE:POSSIBILITIES CURVE:

Lets look at an economy and break Lets look at an economy and break down the commodities into two down the commodities into two commodity groups.commodity groups.

1. Agricultural goods & services1. Agricultural goods & services

2. Non-agricultural goods & 2. Non-agricultural goods & servicesservices

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THE PRODUCTION THE PRODUCTION POSSIBILITIES CURVE:POSSIBILITIES CURVE:

Lets make some initial assumptions Lets make some initial assumptions associated with the PPC associated with the PPC

1. All resources are utilized and are 1. All resources are utilized and are fixed.fixed.

2. Technology is not changing.2. Technology is not changing.

3. Resources are 3. Resources are notnot perfectly mobile. perfectly mobile.

4. There are only two commodities.4. There are only two commodities.

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We can now illustrate the We can now illustrate the PPC curve:PPC curve:

$ of Ag. Goods$ of Ag. Goods

per yearper year

unattainable

attainable production frontier

$ Non-Ag. goods per year$ Non-Ag. goods per year

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The PPC CurveThe PPC Curve

Vertical axis = $ value of Vertical axis = $ value of agricultural goods & services agricultural goods & services produced per year.produced per year.

Horizontal axis = $ value of non-Horizontal axis = $ value of non-ag. goods & services produced per ag. goods & services produced per year.year.

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The PPC CurveThe PPC Curve

$ value = the sum of the price of $ value = the sum of the price of each commodity produced times the each commodity produced times the quantity of each commodity quantity of each commodity produced.produced.

In our example, the $ value of ag. In our example, the $ value of ag. goods + $ value of non-ag goods goods + $ value of non-ag goods equals gross domestic product (GDP).equals gross domestic product (GDP).

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The PPC FrontierThe PPC Frontier

The PPC frontier shows all the The PPC frontier shows all the combinations of the two combinations of the two commodities commodities

that can just be produced if all that can just be produced if all resources are fully employed with resources are fully employed with the technology currently available.the technology currently available.

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The PPC curve illustrates 3 The PPC curve illustrates 3 concepts: (assuming resources concepts: (assuming resources are fully employed)are fully employed)

Scarcity: This is shown by theScarcity: This is shown by the

unattainable points.unattainable points.

Choice: Any of the attainable points Choice: Any of the attainable points areare

possible.possible.

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The PPC curve illustrates 3 The PPC curve illustrates 3 concepts: (assuming resources concepts: (assuming resources are fully employed)are fully employed)

Opportunity cost:Opportunity cost:

This is due to the downward slope This is due to the downward slope of the production possibilities of the production possibilities curve. i.e. To get more non-curve. i.e. To get more non-agricultural goods, you must give agricultural goods, you must give up some agricultural goods.up some agricultural goods.

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An explanation of the An explanation of the negative slope of the PPC:negative slope of the PPC:

The PPC is bowed out, and slopes The PPC is bowed out, and slopes down because of thedown because of the

LAW OF INCREASING COSTS: LAW OF INCREASING COSTS: The The more of one good the economy more of one good the economy produces, the greater the amount produces, the greater the amount of other goods that must be given of other goods that must be given up (opportunity cost increases at up (opportunity cost increases at an an increasing rate).increasing rate).

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Law of Increasing CostsLaw of Increasing Costs

$ Ag.

$ Non- Ag.1

2

3

4

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Law of Increasing CostsLaw of Increasing Costs$ Ag.

$ Non- Ag.1

2

3

4

As we increased the dollar valueof ag. goods and services producedfrom 3 to 4 units, we had tosacrifice this dollar value ofnon-ag. goods and services.

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Why do costs increase as Why do costs increase as more and more of one more and more of one commodity is produced ?commodity is produced ?

Resources are not easily adaptable Resources are not easily adaptable to all types of production.to all types of production. (Not (Not Perfectly mobile!!)Perfectly mobile!!)

It costs more and more to shift not It costs more and more to shift not so adaptable non-ag. resources into so adaptable non-ag. resources into agricultural production, or visa-versa.agricultural production, or visa-versa.

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Economic GrowthEconomic Growth

Over time, we would like to see the PPC Over time, we would like to see the PPC shift outward. shift outward.

When the PPC shifts outward, the When the PPC shifts outward, the economy has grown and our standard of economy has grown and our standard of living is often enhanced. living is often enhanced.

An outward shifting PPC over time An outward shifting PPC over time illustrates the illustrates the ECONOMIC GROWTH ECONOMIC GROWTH you you here about all the time on TV, and read here about all the time on TV, and read about in the newspaper. about in the newspaper.

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What can cause the PPC to What can cause the PPC to shift ?shift ?

Remember the initial assumptions we Remember the initial assumptions we made ? They were somewhat made ? They were somewhat constraining, lets begin to relax them.constraining, lets begin to relax them.

Remember we assumed that Remember we assumed that technology and the amount of technology and the amount of available resources were fixed or held available resources were fixed or held constant.constant.

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Improved TechnologyImproved Technology

An advancement in technology An advancement in technology means more goods and services means more goods and services can be produced with the SAME can be produced with the SAME amount of available resources amount of available resources ((PE).).

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$Ag Goods$Ag Goods Hybrid Corn ExampleHybrid Corn Example

$Non-Ag$Non-Ag

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$Ag Goods$Ag Goods MicrocomputersMicrocomputers

$Non-Ag$Non-Ag

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Advances in technology allow us Advances in technology allow us to increase output with the to increase output with the same or a lessor amount of same or a lessor amount of inputsinputs

What about increases in What about increases in resources themselves?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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$Ag Goods$Ag Goods Increased Labor ForceIncreased Labor Force

$Non-$Non-AgAg

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A Little History: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: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 Present Mix of Consumer and Capital Goods:and Capital Goods:

The present mix of consumer and capital goods can affect the future economic growth of an economy.

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$ Consumer Goods$ Consumer Goods

$ $ Capital Capital GoodsGoods

Pt. A

Pt. B

How will the present position on this production possibilities curve affect the future postion of the $AG vs. $Non-AG PPC? What if the current position is A?

Qty needed to maintain Economy

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Point A: The economy has lots of Point A: The economy has lots of consumer goods and little capital consumer goods and little capital goods. The emphasis is on the short goods. The emphasis is on the short run and not on the long run. A large run and not on the long run. A large shift in the $Ag vs. $ Non-Ag shift in the $Ag vs. $ Non-Ag production possibilities curve would production possibilities curve would not be expected. In this case, the not be expected. In this case, the economy will have more Consumer economy will have more Consumer good consumption now than at point good consumption now than at point B, but future Consumer good B, but future Consumer good consumption will be less.consumption will be less.

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$Ag.$Ag.

$ Non-Ag.$ Non-Ag.

PPC95

PPC97

If the investment in capital is less than the depreciation of capital, the PPC could shift inward.

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Point B: The economy has lots of capital Point B: The economy has lots of capital goods and little consumer goods. The goods and little consumer goods. The emphasis is on the long run and not on emphasis is on the long run and not on the short run. A large shift in the $Ag. the short run. A large shift in the $Ag. vs. $Non-Ag. production possibilities is vs. $Non-Ag. production possibilities is possible. In this case, the economy possible. In this case, the economy will have less present Consumer good will have less present Consumer good consumption now than at point A but consumption now than at point A but future Consumer good consumption future Consumer good consumption will be more.will be more.

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$ Consumer Goods$ Consumer Goods

$ $ Capital Capital GoodsGoods

Pt. B

Pt. A

Qty needed to maintain Economy

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$Ag.$Ag.

$ Non-Ag.$ Non-Ag.

PPC97

PPC95

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.

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DETERMINANTS of the DETERMINANTS of the PPC.PPC.

1. Quantity of resources (FOP's) available 1. Quantity of resources (FOP's) available for society to utilize. for society to utilize.

a.a. If resources increasedIf resources increasedoutput is output is

increased c.p.increased c.p.

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2.2. Improvements in Physical efficiency (New Improvements in Physical efficiency (New Technology!, Enhanced Productivity!)Technology!, Enhanced Productivity!)

a.a. increase (units of output / units of input)increase (units of output / units of input)

b.b. If resources are currently fixed, this is oneIf resources are currently fixed, this is one

way to shift the PPC outward to achieveway to shift the PPC outward to achieve

economic growth.economic growth.

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3.3. The current mix of capital and The current mix of capital and consumer good production.consumer good production.

a.a. If we increase capital good If we increase capital good production relative to consumer good production relative to consumer good productionproductionthis increases one of the this increases one of the FOP's (capital) FOP's (capital) this increases this increases potential future output.potential future output.

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b. This is the primary reason forb. This is the primary reason for investment tax credits and investment tax credits and

capitalcapital gains tax rates.gains tax rates.

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4.4. Mobility of resources: Mobility of resources:

a.a. If we increase (improve) the If we increase (improve) the mobility of resources between the mobility of resources between the production of different production of different commodities,commodities,

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---- We decrease the opportunity We decrease the opportunity cost of moving resources fromcost of moving resources from the the production of one commodity to production of one commodity to the production of another. We the production of another. We take some of the “bow” out of the take some of the “bow” out of the PPC curve.PPC curve.

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$ Ag

$ Non-Ag

b. By reducing the opportunity cost,b. By reducing the opportunity cost,

the potential output of boththe potential output of both

commodities is increased.commodities is increased.

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c.c. Our economy is more resilient Our economy is more resilient to changes in world economic to changes in world economic conditions,conditions,

--resources are more quickly --resources are more quickly re-employed if displaced from there-employed if displaced from the

production of a particular production of a particular commodity,commodity,

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--temporarily unemployed --temporarily unemployed resources are more efficient when resources are more efficient when re-employed in the production of re-employed in the production of alternative commodities.alternative commodities.

--less training or modification is --less training or modification is required, therefore their is a lower required, therefore their is a lower cost of re-allocating these resources.cost of re-allocating these resources.

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d.d. Which of the four categories of Which of the four categories of the FOP's is our society most the FOP's is our society most concerned with in the short-run ?concerned with in the short-run ?

---- LABORLABOR

---- ENTREPRENEURSHIP ORENTREPRENEURSHIP OR

MANAGEMENTMANAGEMENT

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When these two human resources are When these two human resources are unemployed, the social costs are unemployed, the social costs are enormous.enormous.

(Circular Flow(Circular Flowdecreased disposabledecreased disposable

incomeincomedecreased decreased demand)demand)

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e. HOW do we make these two e. HOW do we make these two FOP's more MOBILE ?FOP's more MOBILE ?

--increase the educational and --increase the educational and technical skills level of our technical skills level of our society!!! society!!!

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PRACTICAL AND PERSONAL PRACTICAL AND PERSONAL APPLICATION OF THESE CONCEPTS:APPLICATION OF THESE CONCEPTS:

There is a trade off between investment There is a trade off between investment in education and current consumption. in education and current consumption. As you invest more in education, your As you invest more in education, your current consumption decreases but your current consumption decreases but your future consumption will likely increase. future consumption will likely increase. The relationship between your current The relationship between your current investment in education and your future investment in education and your future consumption can be shown with consumption can be shown with production possibilities curves.production possibilities curves.

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Academics vs. LeisureAcademics vs. Leisure

Hrs. of AcademicsHrs. of Academics

1616

1616 Hrs. of Hrs. of LeisureLeisure

Pt. A

Pt. B

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Basic Wants vs. Other Basic Wants vs. Other Wants with Your H.S. Wants with Your H.S.

DiplomaDiploma$Basic Wants$Basic Wants

$ Other $ Other WantsWants

PPCHS

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What Are Basic Wants?What Are Basic Wants?

Single wide mobile home?Single wide mobile home? An old used vehicle?An old used vehicle? Potatoes and Macaroni and Potatoes and Macaroni and

Cheese?Cheese? Clothes from the Factory Seconds Clothes from the Factory Seconds

Store?Store? ????????????????

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What Are “Other Wants”What Are “Other Wants”

A 2000 or 3000 sq.ft. home with an A 2000 or 3000 sq.ft. home with an acre?acre?

A new vehicle to drive?A new vehicle to drive? Rib eye and T-bone steaks? Shrimp?Rib eye and T-bone steaks? Shrimp? Fashionable Clothing (Carhart’s)?Fashionable Clothing (Carhart’s)? A vacation at the beach or mountains?A vacation at the beach or mountains? Going out for dinner?Going out for dinner? Affording hobbies and recreation?Affording hobbies and recreation?

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Academics vs LiesureAcademics vs Liesure

Hrs. of AcademicsHrs. of Academics

1616

1616 Hrs. of Hrs. of LeisureLeisure

Pt. A

Pt. B

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““Choosing Point B”Choosing Point B”

Point B represents lots of Point B represents lots of LeisureLeisure now and little investment in now and little investment in AcademicsAcademics (education) now. (education) now.

In this case, the PPC for Basic Wants In this case, the PPC for Basic Wants and Other Wants may not shift out and Other Wants may not shift out very much (very much (if any) if any) relative to the relative to the PPC with a H.S. diploma!PPC with a H.S. diploma!

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““Choosing Point B”Choosing Point B”

$Basic Wants$Basic Wants

$Other $Other WantsWants

PPCB

PPCHS

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Academics vs LiesureAcademics vs Liesure

Hrs. of AcademicsHrs. of Academics

1616

1616 Hrs. of Hrs. of LiesureLiesure

Pt. A

Pt. B

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““Choosing Point A”Choosing Point A”

Point A represents lots of investment Point A represents lots of investment in Academics (education) now, and in Academics (education) now, and little consumption of Leisure now.little consumption of Leisure now.

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““Choosing Point A”Choosing Point A”

$Basic Wants$Basic Wants

$Other $Other WantsWants

PPCA

PPCHS

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The Choice is Yours!The Choice is Yours!

The outcome of choosing Point A or The outcome of choosing Point A or Point B is based on the progress Point B is based on the progress made in the same amount of time.made in the same amount of time.

Its your free and independent choice Its your free and independent choice of which point on the Academic vs. of which point on the Academic vs. Leisure PPC to be on!Leisure PPC to be on!

Which will you choose?Which will you choose?