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P roduction P ossibilities F rontiers. Rick Weber See also: http://www.rick-weber.com/EC101/tag/ppf /. What’s the big idea?!. Thinking on paper with 2D graphs Ceteris paribus which means “all else equal” Law of diminishing marginal returns Marginal/Opportunity cost. Disclaimer!.

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p roduction p ossibilities f rontiers

ProductionPossibilitiesFrontiers

Rick Weber

See also: http://www.rick-weber.com/EC101/tag/ppf/

what s the big idea
What’s the big idea?!
  • Thinking on paper with 2D graphs
  • Ceteris paribus which means “all else equal”
  • Law of diminishing marginal returns
  • Marginal/Opportunity cost
disclaimer
Disclaimer!
  • There’s going to be a bit of jargon here
  • Sometimes different terms describe the same phrase
    • I usually use the “fancier” term out of habit.
  • These are some big concepts that are central to economics!
    • And we’re moving fast! Slides are online at Rick-Weber.com/EC101
welcome to the cartesian plane
Welcome to the Cartesian Plane
  • AKA: two-dimensional space
  • AKA: graphs, like back in high school where
  • THIS WILL COME BACK AGAIN AND AGAIN!
    • Get a handle on it now to make your life easier in the future!
what is this 2d graph thing
What is this 2D graph thing?
  • Each axis represents some thing.
    • Moving further along the axis indicates different quantities.
  • Each point represents some combination of the two things.
  • Pro Tip: Consider 2x2 tables.
    • Bottom left: not much of either thing
    • Top right: lots of both things
    • Top left/Bottom right: lots of just one of the things
  • A graph allows us to show relationships between the two things.
    • Note that we are only changing these two variables (i.e. “everything else held equal”).
ceteris paribus all else equal
Ceteris Paribus: All Else Equal
  • This is one of the most important things you can take away from economics.
  • This is a tool of thought experiments
  • It’s much easier to think about changing two variables than changing all variables at once.
  • Also, using the Latin makes you sound fancy!
draw a budget constraint
Draw a Budget Constraint
  • On a piece of paper, draw a 2D graph that illustrates how much fish and/or coconuts you can afford.
    • If you spent all of your money on coconuts, how many do you get?
    • This is a point on the “coconut” axis.
    • You can get the same point for fish axis.
    • Connect these two points with a straight line.
buying fish and coconuts
Buying Fish and Coconuts
  • Fish costs $9.99 each
  • Coconuts cost $3.33 each
  • You have $50
what if you didn t buy fish coconuts with cash
What if you didn’t buy fish/coconuts with cash?
  • What does your budget constraint look like if you’re “buying” fish/coconuts with your own effort.
hunting gathering fish and coconuts
Hunting/gathering Fish and Coconuts
  • At the grocery store, it’s easy to get more fish or coconuts… just pay more.
  • When you’re stranded on an island, some coconuts are laying on the ground, but others will be harder to find.
ppf production possibilities frontier
PPF – Production Possibilities Frontier
  • A PPF illustrates the maximum combinations of products that can be produced with a given set of resources and talent
  • Production: we’re looking at what we can produce
  • Possibilities: we’re looking at what we can produce
  • Frontier: we’re looking at the edge or maximum possible levels of production
  • Simplifying assumption: we’re looking at just two goods
law of diminishing marginal returns defined
Law of Diminishing Marginal Returns Defined
  • Principle of diminishing value: “The more you have of a good [ceteris paribus] the less you value having a little more.”
    • This is essentially the same thing as…
  • LoDMR: “If you hold all inputs but one constant and increase that one, eventually its marginal product begins to decline.”
hunting gathering fish and coconuts1
Hunting/gathering Fish and Coconuts
  • Some coconuts are laying on the ground, but some will be harder to find.
  • However many coconuts you could gather in a day, the last one you find before giving up will be the hardest.
economic growth
Economic growth!
  • Over the last few days you’ve spent less time hunting/gathering so you could collect vines and make a net!
  • What happens to your PPF? (discuss with the person next to you)
economic growth1
Economic growth!
  • If you spend all your time gathering coconuts, the net is worthless.
  • If you spend all your time fishing, the net is fantastic!
law of diminishing marginal returns
Law of Diminishing Marginal Returns
  • The first coconut you collect will be the easiest one.
  • If you decide to look for more, you will then start looking higher up trees.
  • If you spend all your time gathering coconuts, you give up the chance to catch fish
ppfs illustrate cost
PPFs illustrate cost:
  • What is the cost of the 3rd fish?
    • http://www.polleverywhere.com/multiple_choice_polls/53o7uxEmFEPLcD4
  • What is the cost of the 22nd coconut?
    • http://www.polleverywhere.com/multiple_choice_polls/VfecyfjBBSFLosO