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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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### ProductionPossibilitiesFrontiers

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!
• 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
• 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?
• 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
• 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
• 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
• Fish costs \$9.99 each
• Coconuts cost \$3.33 each
• You have \$50
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
• 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
• 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
• 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 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!
• 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 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
• 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:
• 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