Production Possibilities Curve

Summary

The video explains the Production Possibilities Curve (PPC), a key concept in economics. It uses a simple example of an economy producing pizzas and robots to demonstrate trade-offs and opportunity costs due to scarcity of resources. The PPC illustrates how increasing production of one good leads to greater opportunity costs for the other. Real-world examples like national defense vs. civilian goods, and the law of increasing opportunity costs, show how resources are allocated. The video emphasizes that the more you produce of something, the higher its opportunity cost becomes.

Takeaways

• 📊 The Production Possibilities Curve (PPC) is a fundamental economics model that illustrates the concept of scarcity and trade-offs.
• 🍕 In a simplified economy producing only two goods, like pizzas and robots, the PPC shows how focusing on one good reduces the capacity to produce the other.
• ⚙️ When all resources are devoted to making robots, no pizzas can be produced, and vice versa. Different combinations of robots and pizzas can be represented on a graph.
• 🔄 The concept of opportunity cost is central: producing more of one good means giving up some of the other, representing the trade-offs involved in resource allocation.
• 📉 The opportunity cost increases as more of a good is produced. For example, making additional robots becomes more expensive in terms of pizzas as production increases.
• 📈 The curve is concave (bows outward) because resources are not perfectly adaptable, meaning increasing production of one good requires using less efficient resources for that purpose.
• 🔧 As more resources are shifted to produce a certain good (like robots), the cost rises because less-suited resources must be utilized, increasing opportunity costs.
• 🌳 Economists use the analogy of picking low-hanging fruit: producers start with the easiest and cheapest resources, but as they deplete, they face higher costs to produce more.
• 🔫 The classic 'guns vs. butter' scenario demonstrates trade-offs between military and civilian goods, reflecting real-world economic decisions about resource allocation.
• 🚫 Scarcity and trade-offs mean that no economy can produce everything it wants without sacrificing the production of other goods, a key lesson of the PPC.

Q & A

What is the production possibilities curve (PPC) or frontier?

The production possibilities curve (PPC) or frontier illustrates the trade-offs between the production of two goods in an economy, demonstrating the concept of scarcity and opportunity cost.

What is the first lesson the production possibilities curve teaches?

The first lesson of the production possibilities curve is the economic notion of scarcity: producing more of one good means producing less of another due to limited resources.

What is the opportunity cost in the context of the production possibilities curve?

Opportunity cost refers to the value of the next best alternative forgone when making a choice. In the production possibilities curve, producing one good means sacrificing the production of another.

How does the production possibilities curve demonstrate increasing opportunity costs?

The production possibilities curve shows that as more of one good is produced, the opportunity cost of producing each additional unit increases because resources less suited for the task must be used.

Why is the production possibilities curve concave to the origin?

The curve is concave to the origin because resources are not equally efficient in producing all goods, leading to increasing opportunity costs as production shifts toward one good.

What is an example of a trade-off illustrated in the video script?

An example of a trade-off is between producing robots and pizzas. If the economy focuses more on robots, fewer pizzas can be produced, and vice versa.

What is the significance of 'low-hanging fruit' in economics?

The concept of 'low-hanging fruit' refers to the idea that producers use the easiest and least costly resources first before moving on to more expensive alternatives.

What real-world example does the video provide to illustrate the production possibilities curve?

The video uses the U.S. decision to allocate resources between Homeland Security and National Defense, showing how resources are shifted from civilian industries to military needs.

How does the concept of guns and butter relate to the production possibilities curve?

The 'guns and butter' model illustrates the trade-off between military spending (guns) and consumer goods (butter), showing how resources must be allocated between different priorities.

Why do opportunity costs increase as more of a good is produced?

Opportunity costs increase because the most efficient resources are used first, and less efficient resources must be employed as production expands, leading to higher costs.

Outlines

00:00

📈 Understanding the Production Possibilities Curve (PPC)

The first paragraph introduces the concept of the Production Possibilities Curve (PPC), commonly featured in economics textbooks. It emphasizes the fundamental economic principles of scarcity and trade-offs, using a simple economy that produces only two goods: pizzas and robots. The paragraph explains how allocating resources between these two goods results in different possible combinations. These combinations can be plotted on a graph, illustrating the trade-off between making robots and pizzas. This model represents the essence of economic scarcity—choosing one good means giving up another.

05:02

🤖 Trade-offs and Opportunity Costs on the PPC

The second paragraph delves into the idea of opportunity cost, showing how making more robots results in fewer pizzas. As production shifts from pizzas to robots, the opportunity cost (the number of pizzas forgone) increases. The example shows that as robot production increases from 4,000 to 9,000, the opportunity cost rises from 25 to 100 pizzas per robot. This highlights the law of increasing opportunity costs, demonstrating that as more of one good is produced, the cost of producing additional units of that good also rises.

Keywords

💡Production Possibilities Curve (PPC)

The Production Possibilities Curve (PPC) is a graphical representation used in economics to show the trade-offs between the production of two goods. In the video, it illustrates the trade-off between robots and pizzas, highlighting the idea that resources are limited, and increasing the production of one good reduces the capacity to produce the other.

💡Scarcity

Scarcity refers to the basic economic problem that resources are limited and cannot satisfy all human wants. The video uses the PPC to explain how scarcity forces trade-offs in production, as seen in the choice between making robots or pizzas.

💡Trade-off

A trade-off involves sacrificing one thing to obtain another. The video illustrates trade-offs through the PPC by showing that producing more robots means fewer pizzas, and vice versa. This concept is central to the economic decisions that governments and businesses face.

💡Opportunity Cost

Opportunity cost is the value of the next best alternative that is foregone when making a decision. In the video, the opportunity cost of producing more robots is the number of pizzas that cannot be produced, and it increases as more robots are made.

💡Increasing Opportunity Cost

Increasing opportunity cost refers to the idea that as more of a good is produced, the cost of producing additional units of that good increases. The video explains that producing the first few robots costs fewer pizzas, but as robot production rises, the number of pizzas sacrificed increases.

💡Guns and Butter

Guns and butter is a classic economic model used to explain the trade-off between military spending and civilian goods. The video references this model to discuss how finite resources force governments to choose between national defense (guns) and consumer goods (butter).

💡Finite Resources

Finite resources refer to the limited availability of inputs like labor, land, and materials. The video emphasizes that an economy has to decide how to allocate these resources between different goods, such as robots and pizzas, illustrating scarcity and trade-offs.

💡Low-Hanging Fruit

Low-hanging fruit is an economic metaphor for taking the easiest or most accessible opportunities first. In the video, it is used to explain why the initial costs of producing a good are lower because the easiest resources are used first, while later production requires more effort and greater opportunity costs.

💡Concave to the Origin

The term 'concave to the origin' describes the shape of the PPC, which curves outward. This shape reflects increasing opportunity costs as more of one good is produced. The video explains that the PPC is concave because resources are not perfectly adaptable to the production of both goods.

💡Civilian Goods

Civilian goods are products that satisfy consumer needs rather than military or governmental uses. In the video, pizzas represent civilian goods, and the discussion of guns versus butter highlights the trade-off between producing for consumer demand versus military needs.

Highlights

The production possibilities curve illustrates four important economic ideas, starting with the concept of scarcity and trade-offs.

Economists simplify models by focusing on two products, like pizza and robots, to better visualize trade-offs.

If all resources are used to make robots, the economy can produce 10,000 robots but no pizza. As more pizzas are made, the possible number of robots decreases.

The production possibilities curve demonstrates the trade-off between making robots and pizzas, with each combination representing a different allocation of resources.

Opportunity cost is a key lesson: making one product means sacrificing the opportunity to make another. For example, making 9,000 robots costs 100,000 pizzas.

The opportunity cost of making more robots increases as production scales up. For example, going from 7,000 to 9,000 robots requires sacrificing 100,000 pizzas.

The concept of increasing opportunity costs explains why the production possibilities curve is concave to the origin—because producing more of one good becomes increasingly expensive in terms of the other.

Economists often use the guns versus butter analogy to represent the trade-off between consumer goods and military goods, reflecting the allocation of finite resources.

When resources are allocated to defense (guns), fewer are available for civilian goods (butter), illustrating the trade-offs faced by nations.

The more specialized the resources, the higher the opportunity cost of shifting them to produce something else, as seen in moving farmers to gun production.

The principle of 'picking the low-hanging fruit' is used to explain that economies will first use resources that are easiest and cheapest to access.

In economics, opportunity costs rise with the quantity of goods produced, due to the low-hanging fruit phenomenon.

The production possibilities curve not only demonstrates scarcity but also the idea of increasing opportunity costs, which makes it a valuable teaching tool.

The example of Homeland Security in the United States shows how resources must be moved from civilian sectors, like education and construction, to support national defense.

Trade-offs between national security and civilian production are real-world applications of the production possibilities curve, showing the limits of resource allocation.

Transcripts

the production possibilities curve a big

favorite of Economics textbooks for good

reason the production possibilities

curve or Frontier as it's sometimes

called turns out to be a very simple way

to illustrate four very important

economic ideas first it's another

demonstration that economics is based on

the idea of scarcity of

tradeoffs so imagine a fictitious

economy somewhere that makes only two

goods pizzas and robots for the sake of

clarity economists like to make their

models as simple as they can and it

doesn't get much simpler than this

anyway this economy's only two goods are

about to be put up on a table which

represents the trade-off between them

devote all this simplified economy's

resources to making robots and let's say

it can make 10,000 of them but that

means no pizza making just one pile of

pizzas the table shows means making

fewer

robots and as more pizzas are made the

possible number of robots is further

reduced down to a situation of all

pizzas and no robots at

all put the different combinations on a

graph and you've got the production

possibilities Frontier in action so if

you're willing to go without Pizza

entirely that's zero down here on the

x-axis but you can make a full 10,000

robots here on the Y AIS

so production possibility a up there

possibility B involves making at least

some pizza on the table 100,000 pies but

that means we only have the resources to

make 9,000 robots as well there's also

possibility C possibility D and this

Frontier ends down at possibility e

400,000 pizzas no robots at all the

picture looks the same for any two

products

the author of the economy today Brad

Schiller if we want to look at

production possibilities at work in a

real setting just look at the issues

that the United States is facing right

now every public opinion poll shows that

Americans want more Homeland Security

and more National Defense without

question Democrats Republicans everybody

wants it but where are we going to get

it I mean think about it if you're going

to deploy say our police forces to guard

buildings and bridges and

airports what are they going to stop

doing we're making a difficult choice so

why don't we simply hire more police it

would be wonderful if we had more police

we already have 640,000 police officers

in this country and sure we could get

more but where are we going to get them

from we have to take them out of some

other industry we're having the same

problem with the war in Iraq we have to

we have to call up tens of thousands of

national gmen who would otherwise be

producing Goods in the civilian sector

teaching schools working in construction

working as accountants these are the

National Guard who are weakend warriors

suddenly we take them out of their

civilian jobs in order to strengthen our

National Defense we're making a choice

we're moving resources from the

production of butter civilian Goods to

the production of guns our national

security it was after World War II that

economic textbook writers started using

guns and butter to illustrate that there

was a tradeoff between consumer goods

like food and military

hardware the reason behind the trade-off

as Brad Schiller says is that you have

to use finite resources like land labor

and raw materials to make anything again

say pizza and

robots if everyone in the economy is

toiling away in the robot Factory there

will be no one left for the

Parlor okay that's the first lesson of

the production possibilities curve the

economic notion of scarcity anything you

make costs you the opportunity of doing

something else with the same resources

that is their opportunity cost the

second lesson of the production

possibilities curve is a little more

subtle that the more you make of

anything the greater its opportunity

cost go from making zero robots to 4,000

of them and we get quite a payoff what

does it cost us in terms of pizza the

chart makes it clear 100,000 fewer

pizzas or to put it another way minus

100,000 pieces divided by 4,000 robots

so the first 4,000 robots cost an

average of 25 piezas per mechanical man

4,000 goes into 100, 25 times since it's

minus 100,000 that means minus 25 the

minus sign simply says this is a cost a

subtraction from what we

had but look what happens when we go

from 4,000 to 7,000 robots this time we

only get 3,000 more metal heads but but

to produce them we still have to give up

the opportunity of making 100,000

pepperoni specials so again minus

100,000 pizzas divided by a mere 3,000

robots an opportunity cost of about 33

pizzas per

robot and when we go from making 7,000

to 9,000 robots the extra 2,000

automatons still costs us 100,000

forgone pizzas therefore the opportunity

cost increases again 100,000 pies

divided by 2,000 cyborgs 50 pies per

Borg finally the last segment of the

production possibilities curve is the

costliest in terms of orders from

dominoes the last thousand Androids cost

the economy the same 100,000 pizzas but

at a whopping rate of 100 pizzas per

robot and if you spend a little more

time on this graph you you can see that

the same increasing opportunity costs

work in reverse the first 100,000 pizzas

cost one tenth of a Droid per Pizza the

last 100,000 cost four times as

much thus the law of increasing

opportunity cost but what's driving it

why is the production possibilities

Frontier concave to the origin meaning

it bows out from the place the two axis

meet like a cave or cavity it's because

things tend to cost more to produce the

more you produce of them again take the

example of guns versus butter Economist

Cecilia Conrad explains at first we can

move the resources that actually tend to

be better suited for producing guns the

people who are you know perhaps really

good at putting together I'm not sure

what it takes to produce guns these days

probably putting together electronic

circuitry we move those people first

over the production of guns so we can

start producing guns at fairly low cost

but as we try to produce move move more

more and more away from food towards

guns then we're going to eventually have

to start to bring in the people who

really spent all their life out on a

farm somewhere farming and don't have

any idea about how the industrial

process works and aren't really adjusted

to working on an assembly line and so

the cost of getting the extra gun

production is going to start to get

higher and that means and that means

that we're going to have to give up more

and more butter to get the same

incremental uh addition of guns and

similarly going similarly going the

other direction another way to look at

it is that you use your cheapest

resources before any others or to use an

old economics cliche you pick the lowest

hanging fruit first Economist Jim Clark

they go for what you can get most easily

for what has the lowest opportunity cost

when I talk about grabbing low hanging

fruit no it's just right there you just

reach up and grab it and takes hardly

any effort you didn't have to give up

very much to get it if you want the

fruit at the top of the tree you got to

haul out this big ladder and climb all

the way up and then maybe you can still

reach it up at the top but it's going to

take you 10 or 15 minutes to get it and

a lot of equipment and if you don't have

a ladder yet you got to build the ladder

so you want to pick the alternative

that's got the lowest cost in terms of

other things that you have to give up so

the the low hanging fruits the stuff

that's easy to get in other words all

producers start with the easy pickings

now there are arguments about how true

this is in every case

for example aren't computer chips

cheaper the more you make but in a

competitive market economics assumes

that opportunity costs rise with

quantity because of the loow hanging

fruit phenomenon so where are we thus

far the production possibilities curve

or Frontier has Illustrated both the

idea of tradeoffs that is scarcity you

can't have it all and the idea of

increasing opportunity costs there

remain two more key points about the

Curve but we'll get to them in the next

video