Eco 155: Principles of Macroeconomics Class 5

Summary

This script delves into the concept of the production possibilities curve, illustrating the trade-offs an economy must make due to limited resources. It explains the importance of full employment and production, defining efficiency and opportunity costs. The discussion highlights the law of increasing opportunity cost, showing how the cost of producing more of one good rises as resources become less interchangeable. The script also touches on how changes in resources, technology, and social structures can shift the curve, reflecting on real-world implications with examples like the situation in Syria.

Takeaways

• 📚 The script discusses the concept of the production possibilities curve, which illustrates the trade-offs an economy faces when allocating limited resources to produce different goods and services.
• 🌐 It emphasizes the importance of understanding scarcity and the idea that resources cannot create goods and services out of thin air, hence the need to prioritize and choose wisely.
• 💼 The terms 'full employment' and 'full production' are defined, with the former meaning all resources are being used and the latter indicating resources are used where they have the greatest effect on output.
• 🌱 An example is given to show comparative advantage, like growing oranges in Florida instead of northern Canada, to highlight the efficiency of using resources where they are most effective.
• ⚙️ Assumptions of the production possibilities curve include an economy operating efficiently with fixed resources in quantity and quality, and a fixed level of technology.
• 📈 The script explains that the production possibilities curve represents all possible production outcomes given the constraints, showing an infinite number of choices rather than just a few discrete options.
• 🔄 The concept of opportunity cost is introduced, demonstrating that as more of one good is produced, the cost in terms of the other good increases, illustrating the law of increasing opportunity cost.
• 📉 The script uses the law of increasing opportunity cost to explain why it's not possible to have more of everything, as resources are not perfect substitutes and the cost of reallocating them increases.
• 🔄 It also discusses how changes in the quantity or quality of resources, technology, or the legal/social structure can shift the production possibilities curve outward (expansion) or inward (contraction).
• 🏛 The importance of a strong legal and social structure for efficient production is highlighted, as corruption or a lack of work ethic can diminish the production possibilities of an economy.
• 🌍 The script concludes with real-world examples, such as the situation in Syria, to illustrate how conflict and instability can drastically reduce a country's production capabilities.

Q & A

What is the main concept discussed in the video script?

The main concept discussed in the video script is the production possibilities curve, which illustrates the different combinations of goods that can be produced given limited resources and a fixed level of technology.

What does the term 'full employment' mean in the context of the script?

In the context of the script, 'full employment' means utilizing all available resources, ensuring that there are no idle resources or unemployed people who want to work.

What is the definition of 'full production' as mentioned in the script?

'Full production' is defined as using resources in a way that they have the greatest effect on output, producing goods and services where there is a comparative advantage.

What are the assumptions made when drawing a production possibilities curve?

The assumptions made when drawing a production possibilities curve include the economy operating efficiently with full employment and full production, fixed quantity and quality of resources, and a fixed level of technology.

Why is it not possible to have both more education and more healthcare without opportunity costs?

It is not possible to have both more education and more healthcare without opportunity costs because resources are limited, and increasing one area typically means decreasing another due to the law of increasing opportunity cost.

What is the law of increasing opportunity cost?

The law of increasing opportunity cost states that as more units of a good are produced, the opportunity cost of producing additional units of that good increases because resources are not perfect substitutes for one another.

How does the quality of resources affect the production possibilities curve?

The quality of resources affects the production possibilities curve by influencing the efficiency and effectiveness with which goods and services can be produced. Higher quality resources can lead to a shift outward in the curve, indicating increased production capabilities.

What impact does technology have on the production possibilities curve?

Technology impacts the production possibilities curve by determining the knowledge and methods available to turn resources into goods and services. Advances in technology can shift the curve outward, indicating that more can be produced with the same resources.

How can changes in legal and social structures affect production possibilities?

Changes in legal and social structures can affect production possibilities by influencing the stability and predictability of economic activities. A strong legal framework and positive social structures can enhance production, while corruption or social unrest can diminish it.

What happens to the production possibilities curve when there is a war or conflict?

During a war or conflict, the production possibilities curve may shift inward due to the loss of resources, destruction of capital, decline in the quality of resources, and the breakdown of legal and social structures, leading to reduced production capabilities.

Can a country produce more of both goods simultaneously without any changes in resources, technology, or social structures?

No, a country cannot produce more of both goods simultaneously without changes in resources, technology, or social structures due to the constraints of the production possibilities curve and the law of increasing opportunity cost.

Outlines

00:00

📈 Introduction to Production Possibilities Curve

The script introduces the concept of a production possibilities curve, which is a model used to understand the allocation of limited resources to produce goods and services. It emphasizes the scarcity of resources and the resulting limitation on production. The video aims to explore methodologies to address this scarcity, defining terms like 'full employment' and 'full production'. Full employment refers to utilizing all available resources, while full production is about using these resources where they have the greatest effect on output, often in areas of comparative advantage.

05:01

🔍 Assumptions of the Production Possibilities Curve

This paragraph outlines the assumptions underlying the production possibilities curve model. The economy is assumed to operate efficiently, with full employment and production, meaning all resources are actively contributing to output. Resources are considered fixed in both quantity and quality, and technology is also fixed. The assumptions provide a snapshot of an economy at a given moment, acknowledging that these factors can change over time, affecting the shape and position of the production possibilities curve.

10:01

🍕📚 Trade-offs and the Shape of the Production Possibilities Curve

The script uses the example of choosing between producing pizzas and textbooks to illustrate the concept of trade-offs. It explains that if all resources are dedicated to one product, none can be allocated to the other. The graph of these choices forms the production possibilities curve, which represents all possible combinations of two goods that can be produced efficiently. The curve shows the trade-offs involved in producing more of one good at the expense of the other, highlighting the infinite number of choices along the curve.

15:04

📉 Inefficiency and Impossibility in Production

This section discusses the concepts of efficiency and possibility in the context of the production possibilities curve. Points inside the curve represent inefficient production, while points outside the curve are impossible given the current level of resources, technology, and other factors. The script emphasizes that all points on the curve are efficient and possible, but there is no single 'best' point, as preference for a particular point is subjective and normative.

20:09

📚 Opportunity Cost and the Law of Increasing Opportunity Cost

The script explains the concept of opportunity cost as it relates to the production possibilities curve. Opportunity cost is the value of the next best alternative given up when making a choice. The law of increasing opportunity cost states that as more of one good is produced, the opportunity cost of producing additional units of that good increases. This is due to the fact that resources are not perfect substitutes for one another, leading to diminishing returns as resources are reallocated from one production process to another.

25:17

🛠️ Factors Influencing Production Possibilities

This paragraph delves into the factors that can shift the production possibilities curve, such as changes in the quantity or quality of resources, advancements in technology, and the legal and social structure of a society. It provides examples of how these factors can either expand or contract the curve, thereby affecting the potential output of an economy. The script also touches on the importance of a strong work ethic and the rule of law in maintaining an efficient and productive economy.

30:18

🌐 Real-World Implications of Production Possibilities

The script concludes by applying the concept of the production possibilities curve to real-world scenarios. It uses the example of Kobani, Syria, to illustrate how conflict and social upheaval can diminish the production possibilities of a region. The destruction of infrastructure, loss of human capital, and the breakdown of legal and social structures all contribute to a reduction in the quantity and quality of resources available for production, shifting the curve inward and limiting the potential output of goods and services.

Keywords

💡Production Possibilities Curve

The Production Possibilities Curve (PPC) is a conceptual tool used in economics to illustrate the different combinations of two goods that can be produced with a given quantity of resources and a fixed level of technology. In the video, the PPC is used to demonstrate the trade-offs an economy faces when deciding how to allocate its resources between two goods, such as pizza and textbooks. The curve shows all the possible combinations of production that are achievable with the current level of resources and technology, and it is a central theme of the video.

💡Scarcity

Scarcity refers to the economic concept that resources are limited while human wants are virtually unlimited. In the video, scarcity is mentioned to explain why goods and services cannot be created out of thin air and why choices must be made regarding the allocation of resources. It is a fundamental economic problem that the PPC helps to address by showing the potential outcomes of different resource allocations.

💡Full Employment

Full employment is an economic state where all available labor resources are being utilized. In the video, full employment is defined as using all available resources without having idle resources or unemployed people who want to work. It is an important assumption in the PPC model because it establishes the baseline for the efficient use of resources.

💡Full Production

Full production is the concept of using resources to their greatest effect on output, producing goods and services where there is a comparative advantage. The video explains that full production means not just using all resources, but using them in the most productive way possible, such as growing oranges in Florida instead of trying to grow them in northern Canada.

💡Comparative Advantage

Comparative advantage is an economic principle that states that an economy should produce goods and services for which it has the lowest opportunity cost, or the least it has to give up to produce more of that good or service. In the video, the concept is introduced to explain why certain goods should be produced based on the resources and capabilities that an economy has, rather than trying to produce everything.

💡Efficiency

Efficiency in the context of the video refers to the optimal use of resources to produce the maximum output. Points on the PPC represent efficient production levels where resources are allocated in a way that no more of one good can be produced without reducing the production of another. Inefficient points, like Point F in the script, are inside the curve and represent a waste of resources.

💡Opportunity Cost

Opportunity cost is the cost of forgoing the next best alternative when making a choice. In the video, opportunity cost is used to explain the trade-offs involved in resource allocation. As the economy moves from producing one good to producing more of another, the opportunity cost changes, illustrating the concept of the law of increasing opportunity cost.

💡Law of Increasing Opportunity Cost

The law of increasing opportunity cost states that as more of one good is produced, the opportunity cost of producing additional units of that good increases. In the video, this law is demonstrated by the increasing cost of producing additional pizzas as resources that are better suited for textbook production are reallocated to pizza production.

💡Resources

Resources in the video refer to the inputs used in the production of goods and services, such as labor, capital, and land. The script discusses the importance of using these resources efficiently, as they are finite and fixed in quantity and quality for the purpose of the PPC analysis.

💡Technology

Technology in the video is defined as the knowledge and methods used to turn resources into goods and services. It is one of the factors assumed to be fixed in the short term for the PPC analysis. Changes in technology can shift the PPC outward, indicating increased production possibilities.

💡Legal and Social Structure

Legal and social structures refer to the societal and legal frameworks that influence economic activity. In the video, changes in these structures can affect the production possibilities of an economy, either by enhancing or restricting the efficient use of resources and technology.

Highlights

Introduction to the concept of the production possibilities curve (PPC) as a tool for understanding the allocation of scarce resources.

Explanation of the scarcity of resources and its impact on the limitation of goods and services production.

Definition of full employment and its distinction from overexploitation of resources or unethical labor practices.

Clarification of full production, emphasizing the efficient use of resources based on comparative advantage.

The analogy of growing oranges in northern Canada versus Florida to illustrate the concept of comparative advantage.

Assumptions underlying the PPC model, including efficient operation, fixed resources, and constant technology.

Graphical representation of the PPC with examples of different production choices for pizza and textbooks.

The infinite number of choices along the PPC and the concept of connecting these to form the curve.

Discussion on the subjective nature of choosing the best point on the PPC based on societal preferences.

Introduction of the opportunity cost concept and its role in decision-making along the PPC.

Illustration of the law of increasing opportunity cost with the trade-off between pizzas and textbooks.

Explanation of why resources are not perfect substitutes and the implications for opportunity costs.

The impact of changes in resources, technology, and social structures on the PPC.

Examples of how political promises of increased spending in multiple sectors can conflict with the PPC and opportunity costs.

Visual demonstration of the PPC shift using the example of Syria's production capabilities before and during conflict.

The importance of legal and social structures in maintaining an efficient production system.

Conclusion emphasizing the PPC as a snapshot of economic possibilities and the dynamic nature of resources and technology.

Transcripts

[Music]

okay so what we want to do is we want to

continue our discussion here and we want

to look at a completely different model

and that would be production

possibilities curve so we know let's go

back and review we know we have this

idea of our resources and we know that

we want to turn these guys into goods

and services and we know that those

resources are limited in scarce

therefore we know that the goods and

services themselves are going to be

limited in scarce because we can't

create these goods and services out of

thin air so in essence we're gonna have

this problem and if we if there's some

amount of resources here that are not

being used whatever this fraction is

right it's this fraction here not used

is it obvious that this guy is going to

be a little bit smaller all right not

created is that obvious if we don't have

it we have resources that are not being

used there's gonna be stuff that's not

being made right because we can't make

goods and services out of thin air we're

not God we have to have resources to

make those goods and services the

problem is is that even if we do get and

wind up and use all of these guys we're

still gonna have a limited amount of

goods and services to produce that's

just what there is so what we want to

know is we want to know what type of

methods or methodologies or whatever can

we use to kind of understand this

problem in a little bit more detail now

what we're going to do is we're going to

use something called the production

possibilities curve

hi now before we start looking at this

guy we need to define a few terms so we

need to find full employment and we need

to find full production so full

employment means we're going to be using

all of these resources okay it does not

mean that we're over exploiting the

environment or that you're using child

labor or something like that right

here's your set of resources we want to

use them all we don't want resources

sitting idle it doesn't make sense to

have people unemployed that want to work

it doesn't make sense to build factories

and have them sit there right so we want

to use all of these available resources

full production is this idea we want to

use these resources where they will have

the greatest effect on output

now we'll define this guy as essentially

using our u resources producing with the

good and services they have a

comparative advantage in will define

what we mean by compare to advantage a

little bit later on but we can kind of

conceptualize what this guy means right

now and let's look at it like this

we've got oranges that we want to grow

and the question is can we grow these

guys in northern Canada can we grow

oranges in northern Canada not easily

because we could do it what would we

have to have a green house right you

could grow oranges in North Canada and

you might even use full employment of

all of your resources to try to make

that happen right it might take a whole

lot of more resources to try to grow

oranges in North Canada in fact it does

take a whole lot more resources to try

to try to grow oranges in northern

Canada but then it does in Florida so we

might have full employment but that's

not full production right that's not

using those resources we're gonna have

the greatest effect on output right in

other words it's much easier to grow

oranges in Florida where they naturally

want to grow and like northern Canada

grow wheat Wow

so we have this idea of our full

employment in full production right so

let's look at some assumptions here

economy is operating efficiently right

now what we mean by this is that we have

full employment and full production

we're producing the goods and services

that we have a comparative advantage in

we have the resources are not sitting

idle right people have jobs factories

are being used we don't have stuff just

sitting around doing nothing our

resources are fixed in quantity

Wow so we have our factors of production

which is another name for our resources

our factors of production are fixed in

quantity right the labor force isn't

growing or shrinking the amount of

capital is not increasing or decreasing

lands not increasing or decreasing etc

our factors of production are fixed in

quality right so our labor force isn't

becoming more educated or less educated

capitals not increasing or decreasing in

quality etc

technology is fixed alright so what do

we mean by technology when you hear the

word technology what do you think of

yeah computers right generally what

people say but that's not in essence

what we mean right what we mean by

technology is our knowledge of how to

turn resources into goods and services

we kind of saw that last time on the

video right where we had people that

we're taking different types of

chemicals and turning them into

something completely different right or

people were combining this stuff to

create something else or people are

using all of these different things to

create brand new products right

none of that stuff necessarily needed

computers per se so we have these four

assumptions here else have two goods

pizza and textbooks we have these

assumptions here we've got two goods

pizza and textbooks and in essence what

we're saying is that well our economy is

operating efficiently in other words

we're using all of our resources we're

using we're gonna have the greatest

effect on output our factors of

production are fixed and quantity and

quality and our level of technology is

fixed now do we typically see this the

labor force doesn't change at all the

labor force is in getting more educated

or less educated and our knowledge of

how to turn stuff into goods and

services doesn't changing at all do we

see that no all right so we can think of

this as a snapshot

because over time we know that these

guys are changing alright so we're just

looking at a snapshot for right now

we'll change these assumptions here in a

few minutes so let's look at our choices

so we're gonna have textbooks up here we

have pizza here

and if we devote all of our resources to

making textbooks we can make 10

textbooks and if we have all of our

resources making textbooks how many

pizzas can we make zero all right if we

devote all of our resources to making

pizza we can make four pizzas and if we

have all of our resources being devoted

to pizza how many textbooks can we make

zero so here are five of our different

choices right we've got ten textbooks

and one pizza nine books or strike that

10 textbooks and zero pizzas nine

textbooks one pizzas 7 and 2 4 and 3 0

and 4 right and we can look at these on

a graph so we're gonna put pizza over

here no particular reason

we'll put books over here blessing okay

and we've got these little sets of

choices here alright so here's 10 I'll

call this guy a here was annoying and he

was he looks it here

call this guy be it was 7 I'll put him

out here see I'll call him D

three two one all right so here's our

five different choices plotted on a

graph all right now are there really

only five different choices No can you

make half a pizza yeah right

I get half homeworks half quizzes half

tests all the time right you can Colt

you can totally make half a pizza you

can totally make half a textbook right

so we don't actually have five different

choices how many choices do we actually

have an infinite number of choices right

very good and when we connect all of

those infinite number of choices

together we get the production

possibilities curve all right

because this curve shows all the

different possible production

alternatives

given these set of choices over here

right given the set of choices that we

are operating efficiently our factors of

production are fixed in quantity our

factors of production are fixed in

quality and our technology is fixed now

which point is best what did you say so

you got this one right here so what's

your name

Mary Mary says D is best what do you

think well so which one would you choose

so she chooses C what's your name

Courtney Cu okay who's right is it C or

is it deep we're gonna have an election

do we want seven textbooks in two pizzas

or do we want four books and three

pizzas any of these points on the curve

is just as good as any other point there

isn't any best point per se on the curve

right which point you want to be at a B

C D or E which one's best quote unquote

is a normative issue but we can look at

a couple of other points we can look at

say point F

and point G and I'm going to make point

F right here so point F is for books and

one pizza so let's look at this guy for

a second for books and one pizzas he

possible yeah because it's possible when

we're making one pizza to make as many

as nine books what do we have to do to

make four books instead of nine yeah

just be inefficient just be lazy that's

all you got to do not have people work

all right so we see that this guy is

possible but not efficient let's look at

Point G point G I'm gonna stick out here

so Point G here is seven books

and three pizzas what's true about this

guy it's not possible it's not a matter

of working harder it's a matter we can't

do that we do not have either the

quantity or the quality or the level of

technology to make point G he is not

possible so this guy point G here not

possible so if we're comparing the guys

on the line to the guys inside the guys

on the line are better than the guys

inside

that's not normative that's positive the

guy outside here being better than the

guys on the line that's true all right

that's not a pause I mean that's not a

normative issue that's a positive issue

but as to which point we want to be on

the line that's a normative issue so we

can say that the points on the line are

superior they're better than the points

inside we can't say that points outside

are better than points on the line we

can't say which point on the line we

want to be yet that we can't say that's

I mean you can say that that's what we

have to do but you can't say B is better

than deep right that's that value is

subjective sort of thing that we talked

about earlier you can't objectively

measure about you cannot say D is

clearly superior to B because it's not

depends on people's preferences okay

let's look at something here

let's assume we're at Point a and we

move to point B what do we gain very

good so we're gonna gain a pizza what do

we lose one book very good all right so

we have an opportunity cost here I'm

just gonna brief ate opportunity cost Oh

see we have an opportunity cost here in

one book let's go from point B to Point

C what do we gain very good

what's its opportunity costs very good

everyone see that so when we go from

point A to point B we're gonna gain a

book we're gonna lose I mean strike that

we gained a pizza we're gonna lose a

book right so here is that opportunity

cost for our first pizza all right

here's the opportunity cost for our

second pizza right I mean in essence

you're just going to hear here's what

you had to gain the second time let's go

from Point C to point D

what do we gain I already started

writing it what do we gain one pizza

what's the opportunity costs three books

and you can actually measure the size of

that let's see we've used will use green

this time here all right

this green guy larger the red guy good

guy large and the blue guy let's go from

point D to point eat blessing what do we

gain one pizza what do we lose what's

its opportunity cost

and you can actually measure that here

we'll do it with this guy right here and

black so let's think very very carefully

about what's happening here is we make

more and more pizzas what's happening to

the opportunity cost of another pizza

it's getting bigger right we call this

the law of increasing opportunity cost

and what this law of increasing

opportunity cost says is that as you

make more and more units of a good the

opportunity cost of making more

increases hence the name increasing

opportunity costs so as we try to make

more and more pizzas the opportunity

cost we're gonna have to give up in

terms of books is going to go up right

and we can see that they're the first

pizzas only cost us one book the second

pizza though cost us two books the third

pizza cost us three books the fourth

pizza cost us four books

why

why does the opportunity cost increase

well why would the opportunity costs not

to stay the same be constant every

single time you want another pizza it'll

cost you a book that's it right there

resources are not perfect substitutes

for each other

so let's think very very carefully about

what this guy's says

what does it take to make pizza what do

you need dough sauce cheese toppings

would you say in the oven

for us

pan this Pizza gonna assemble itself

labor

Yatta Yatta Yatta Yatta right bubble a

little digital you got an idea what it

takes to make a pizza you've all seen

pizza before you know what it is it's

not that complicated

what does it take to make textbooks

paper ink glue printer press printing

press slash binding mm-hmm a writer /

editor yadda yadda yadda yadda yadda

yadda yadda right so you know what it

takes to make a book does our economy

contain all of these resources yes

because we can make textbooks and pizzas

therefore we have to have a printing

press and a binding machine and an oven

you have to because we know that we can

make textbooks and pizzas now let's

think very very carefully about this so

here we are we're making all textbooks

and we say I don't want to make all

textbooks I want to make some pizzas how

much does that contribute to textbook

production very little right when I was

in college

our landlord our oven was gas the heat

in the house was electric he paid the

gas bill we paid the electric bill so

what we would do on cold days in

Northeast Missouri we would crank up the

oven to 500 degrees

open the door stick a fan in front of it

in and blows free heat out right so we

could use the oven the heat

part of the place where we're printing

right it doesn't have zero value but it

doesn't have a whole lot of value right

so as we're here at a we're releasing

and we're moving to B we're releasing

resources and we're going to release the

resources that are really really good at

making pizzas well that's gonna be the

oven and the sauce which we were using

to lubricate the binding machine alright

well we found something about or we

found you know three and one oil or

whatever so we're releasing these

resources that are really good at making

pizzas but they're not very good at

making ovens and because they weren't

real they're not really good at making

books because they weren't really good

at making books book production doesn't

fall by that much it only falls by one

and then as we get farther and farther

down this guy as we go from like D to e

now we're trying to take all of these

resources over here that are really

really really really good at making

books and not that great at making

pizzas and try to get them to make

pizzas I sense they're really good at

making books book production falls by a

whole lot and since they're not that

great at making pizzas pizza production

doesn't go up by that much right so

these resources are not perfect

substitutes for each other and because

of that we have this law of increasing

opportunity cost is we try to make more

and more more of some good the

opportunity cost is going to increase

and you can see this

here right

here's education here's healthcare

and I'm gonna just to show you that this

isn't a contrived example and I'm not

this doesn't show increasing opportunity

cost because I drew it trickily all

right I'm gonna make these old guys the

same

okay so here's four units of education

here's three units of education there's

two units of education here's one unit

of education health care can be anything

up here your health care alright so here

you are at some point it can be any

point that you want it to be right as we

go from making all health care to making

education all right we've got one unit

of education here here is the

opportunity cost there's what it cost us

in terms of health care that's how much

health care we had to lose right and we

want to make another unit of education

all we did was double this guy that guy

in green is clearly larger than the guy

in red and all we want to do is increase

it again one more unit that guy in blue

is clearly larger than the guy in green

right and then once again right going

from I'll use I guess I'll use blonde

and then we have this guy down here

right

so if we're at this point right here oh

it could be anywhere we're here and the

politician says we're gonna have more

education and more health care because

that's what they say is that going to be

possible no right if you want more

health care that's fine

but this guy actually has to decrease

not increase right and the same thing if

you're here alright if you're here and

you say we're gonna have more education

and more healthcare I mean that's fine

but this guy has to go down right I mean

and you can see it I mean I'm a I'm a

perfect example right I mean my name is

or my title

dr. Mitchell all right

do you want me operating on you know

right I am not that kind of doctor so

let's assume we live in a totalitarian

state where they say we don't want you

doing education anymore we're gonna put

you in the healthcare field okay it's

fine what can I do in the healthcare

field

be an administrator what else can I hand

a scalpel to the doctor

scope ooh can I do that stat all right I

can say stat all right I can clean up

after people after they've thrown up

from having surgery all right and all of

the other things that goes into a blah

blah blah blah blah but I can't operate

on people all right so if you take me

and I like to think that I have a

comparative advantage in education

if you switch me from education to

health care because I'm really really

good at education this guy goes down by

a whole lot but I'm not that good at

health care I don't really enjoy that

this guy goes up by a little bit all

right and so the total is you actually

kind of mean if you want more healthcare

that's fine you know so stick me in

where I'm gonna have the greatest effect

on health care I don't know where that's

gonna be but health care is going to go

up by a little bit education is going to

go down by a lot we're gonna have this

increasing opportunity cost is we want

to make more and more of some good

whatever that something is it doesn't

matter it's when a politician tells

you're gonna have both more education

both more health care we're gonna have

more national defense and everyone's

taxes are gonna get cut you know that's

not happening that can't be true

something has to go down right you have

to have this opportunity cost this is

the thing that people also don't

understand people don't understand why

we were here wherever this point is for

health care and then they said we want

more health care and that's fine you can

have more health care if you want you

can have all the health care you want I

could care less all right or you're here

wherever you're here and people say oh

we want more health care we want to go

this way that's fine but that health

care cost has to

increasing which is exactly what it's

been doing right I mean if you look at

2008 to today the total amount spent on

health care has been going up that's not

surprising the opportunity cost is going

up it's not going down because is you

want more of something the law of

increasing opportunity cost says getting

more units of something that's going to

have a larger and larger and larger

opportunity cost it's just the way that

it is and that's going to be true like

we said for education for whatever and

whatever it is that they're promising

you questions about this before we move

on right I mean it doesn't have to be

this it can be your economics test and

biology the more time you spend studying

for economics the less time you have to

spend studying for biology I don't need

to study more for biology that's fine

going this way that means less time to

study for economics increasing

opportunity costs so let's go back and

look at our assumptions right we said

our resources were fixed in quantity

our races our sources are fixed in

quality and our technology is fixed what

happens when these guys change because

these guys do change no texting in class

please thank you what happens when these

guys change exactly right

[Applause]

so let's look at the winter education

healthcare doesn't matter must do

something stupid

our production possibilities curve for

computers and beach balls so if we see a

change here and our level of resources

our quantity of resources or a change in

our quality of resources or our level of

technology remember technologies is

knowledge of how to turn resources into

goods and service that has nothing to do

with computers then we're gonna see this

production possibilities curve shift out

and there's one more kind of here I'm

going to call this legal slash social

structure all right these these social

constructs that we use to define society

are very very important right in other

words what we mean by these legal and

social structures is that when you have

I mean I kind of put this if there's no

rule of law it's very very difficult to

make contracts right and the contracts

don't have to be formalized contracts

where it's actually written out and

signed and notarized it can be a social

contract that you're making with other

people all right same thing here when

you have this kind of social structure

if there's if some country has a really

strong work ethic then giving these

conditions they're going to be able to

make more than a country that has a

social structure it doesn't have a

strong work ethic they're gonna have all

of these resources and quantity and

quality and levels of technology and

don't make less stuff right or if the

legal structure changes in such a way

that the rule of laws and followed

anymore and it's corrupt you're gonna

have less stuff being made it's just the

way that it is so we have these things

changing right our production

possibilities curve and essence is going

to shift out

right and so we have here you have like

this guy right here I'll call this guy

Point C or it's calling point X so here

we have C 1 and B 1 and thanks to this

increase in the quantity or quality of

resources has changed technology or our

legal and social structure changed such

such a way that we are actually able to

make more stuff what happens with b1 and

c1 what's what's true about X and what's

true about Y so before we have this

change what's true about X possible yeah

efficient yes what's true about why not

possible now we have this change now

what's true about x and y x is possible

and he is inefficient what's true about

why he's efficient all right and you can

actually see here that we've got like

say c2 b2 right it's possible for us to

make both more beachballs

and computers or we could do something

different right we could make the same

number of computers more beach balls we

could make the same number of beach

balls and more computers right or any

combination between we can make more

boats we can also have it's these guys

going down all right there's a possible

for our country to have the quantity of

its resources diminish yeah quality

totally technology

I guess sure I don't know how that works

but yeah legal and social structure for

the for the country become more corrupt

or people to stop working yeah yeah

because that was a that was a snapshot

that one was saying where do we want to

be do we want to be here or do we want

to be here we can change the quantity

and quality of resources in the long run

can we change it tomorrow President

Trump gets elected Trump didn't get

elected Hillary Clinton elected Bernie

Sanders getting elected George got

elected Fred

his name is George Fred that's his name

president Fred comes in and says okay

and in six months time we're gonna have

both more national defense spending and

more health care spending and more

education spending and we're going to

create more beachballs and computers is

that gonna be possible not over the long

term could you do it possibly so if

these guys are diminishing what's

happening to our production

possibilities curve here he's shifting

it so here we see this guy doing this

so here we've got what are we looking at

computers and beach balls c1v1 right now

this guy is shifting in so here's our

point X we had a decrease in our

quantity of resources

so what's true about X

he used to be what possible and

efficient now he's he's not possible

point Z used to be inefficient and

possible now point Z is efficient right

so if you want to see production

possibilities curve changing I mean you

can see that it's really easy

here is kobani Syria I don't have a

slide a studio where this city is

someplace in Syria all right

and you can get a sense of what it looks

like right there all right I don't know

I don't have the slightest idea of what

they make I don't know what they make

they make stuff whatever it is right you

got all these buildings there and homes

and stuff clearly they're making

something obvious right what's been

going on in Syria for a while killing

each other and blowing stuff up right

there's what it looks like today what

are they making now not much because

whatever was being made here whatever

that was can't be made anymore I mean

look at this there's no building here

that I can see in this picture that has

no damage to it so here's these

resources quantity of labor quantity of

capital right quality of labor quality

of capital and the quantity and quality

of diminished right people are dead the

smart people left a long time ago right

the quantity of labors gone down or the

quantity of capital has gone down the

quality of capital that's left has gone

down there still are the same levels of

technology I mean I doubt there how to

turn resources and good in the services

change unless of course all the smart

people left and then all the people left

are the dumb people

then maybe the level of technology has

gone down all right

and their legal and social structure

what type of social structure do you

have now it's non-existent right there's

no legal sir

hey you parked your car illegally I'm

gonna do X Y & Z what boom boom

you're dead there's no legal and social

structure there anymore

it's an arc so we've seen a diminishment

of their production possibilities curve

well pick it from here on Friday