Economics

BBA 2501 Unit I Ch 2 Production Possibilities Frontier

00:00:01 Hello class.

00:00:02 We're gonna be talking about the Production Possibilities Frontier in this video, often called the PPF in economics.

00:00:12 Now think about the world, it is constantly changing, we're constantly getting new resources being added.

00:00:20 New products are always being developed, the supply of existing products is changing, going up and down.

00:00:27 The number of examples just goes on and on about how the world can change.

00:00:34 Economics tries to simplify this dynamic world, it would be impossible to jump in conclusions if we didn't.

00:00:44 For instance, we assume resources are fixed in both quantity, and quality over specific period of time.

00:00:51 We assume that technology doesn't change over a specific period of time, we also assume laws, customs, property rights and everything else.

00:01:00 Those don't change.

00:01:02 We try and simplify things and get it down to an area that we can actually focus on and try and draw some conclusions.

00:01:13 Looking at the production possibilities frontier, well, it tries to identify the combination of two different goods.

00:01:21 Just two different goods that can be produced when resources are used efficiently.

00:01:28 Employing these resources efficiently means there's no way to increase the production of one good without decreasing the production of another.

00:01:36 We have to give up one to produce the other.

00:01:41 Here we have what is traditionally a drawn production possibilities frontier.

00:01:47 Showing the combination of two goods that can be produced given the resources that we have.

00:01:53 So we can produce 100 cars or 25 televisions.

00:02:00 We can produce any quantity of televisions and cars in the green area.

00:02:05 So we could produce all cars or all televisions or any combination of the two as long as they're inside the green area.

00:02:15 The red line, that shows the maximum number of televisions and cars that we can produce given the resources that we have.

00:02:24 We cannot produce beyond that red line.

00:02:30 Now, let's look at producing inside the green area, here I've labeled this as point I.

00:02:38 If we produce at point I, we're not using the resources efficiently, we could actually produce it a level on the red line.

00:02:47 That's where we're efficient.

00:02:49 Producing inside the production possibilities frontier, we're not using our resources efficiently.

00:02:55 Maybe that resource is labor, maybe it's technology, maybe it's capital resources.

00:03:05 Producing, again producing beyond that red line, that's not possible given the resources that we have.

00:03:12 We don't have the labor available, we don't have the capital, we don't have the building space.

00:03:17 Some limiting resources out there that keeps us from moving beyond that red line.

00:03:25 Now, we could choose to produce nothing but cars, or nothing but televisions.

00:03:33 If we produce only cars, the most that we can produce is 100, if we only produce televisions, the most we could produce would be 25.

00:03:49 If we produce 50 cars, we could not produce more than 21 televisions.

00:03:57 See how that falls along that red line.

00:03:59 We can produce somewhere on that red line but if we give up one, we can get another.

00:04:07 So if we were only producing televisions and we decided to give up for, we could produce 50 cars.

00:04:16 Increasing the production of cars from 50 would mean that we're gonna have to decrease the number of televisions we could produce.

00:04:23 Because remember, we're assuming that resources are fixed.

00:04:27 So if we wanted to increase and produce 90 cars, we would have to decrease the number of televisions to 12.

00:04:37 Because again, that's where it touches the production possibilities frontier.

00:04:44 Another example, remember my dog Luna?

00:04:47 Well, Luna loves to chew on shoes and she loves to chase the cat.

00:04:55 She can produce chewed shoes or chase cats.

00:05:01 That means a production possibilities frontier can be drawn from my dogs production.

00:05:09 And here I've drawn it, my dog can produce, again, chewed shoes or chased cats.

00:05:18 In one hour, my dog could chew up two shoes or chase the cat 5 times.

00:05:28 That's producing nothing but chase cats or chewed shoes.

00:05:34 Or my dog, Luna can chew up 1.6 shoes and could chase the cat 2 times.

00:05:45 Or she could chew up 1.25 shoes and chase the cat 4 times.

00:05:51 But notice, if she wants to chase the cat, she's gonna have to give up chewing on shoes and vice versa.

00:06:02 Now there are things that can shift this production possibilities frontier to a new location, that red line can shift.

00:06:10 Remember, we're assuming everything is constant except for the products or services listed on the vertical axis.

00:06:17 And horizontal axis of that production possibilities frontier.

00:06:22 Cars and televisions in the first example were used, and chewed shoes and chase cats were used in the second example.

00:06:29 Those are the only things that were allowed to change.

00:06:34 However, over time, economists recognize the factors can change that can cause that production possibilities frontier to shift to another location.

00:06:45 Specifically, we could look at changes in resources available, maybe people decide to work longer hours.

00:06:54 We have changes in capital stock, in other words, getting more education this year, results in more production next year.

00:07:04 Changes in technology, those are happening all over the place.

00:07:08 The Internet shifted the production possibilities frontier for many firms as they could find resources more easily.

00:07:18 We've also got changes in laws, a decrease in the income tax rate encourages people to work longer.

00:07:25 So we can shift that production possibilities frontier outward.

00:07:31 Here, we have an example of an increase in available resources, capital stock, maybe technology or favorable laws.

00:07:41 And those shifted the production possibilities frontier from PPF1 to PPF2, that's an increase in the production possibilities frontier.

00:07:54 Another production possibilities frontier could also shift inwards.

00:07:58 Say, we have a decrease in available resources, capital stock, technology or unfavorable laws.

00:08:06 That would cause the production possibilities frontier to shift back from PPF2 to PPF1.

00:08:15 Now, the shape of the production possibilities frontier does matter, it tells us a lot about the goods that we're examining.

00:08:25 We've looked at the shape of one that's bowed outward, whenever we looked at cars and televisions.

00:08:33 The production possibilities frontier could actually be a 45 degree straight line or it can actually be even a right angle.

00:08:42 Let's take a look at some of these.

00:08:45 Well, a straight line production possibilities frontier suggests that the goods are perfect substitutes.

00:08:52 For instance, take apple juice and orange juice in this example.

00:08:56 A firm could bottle either of these two juices with the same equipment, the same labor, everything.

00:09:04 So they could bottle 250 bottles of apple juice or 250 bottles of orange juice, the key here is it that 250 bottles is the most that they can produce.

00:09:19 If they decided to bottle 100 bottles of apple juice, they could bottle 150 bottles of orange juice, that would still give them 250 bottles maximum.

00:09:30 These are perfect substitutes.

00:09:34 Now right angles, they suggest perfect complements For instance, let's think about producing a pair of shoes, you have a left shoe and you have a right shoe.

00:09:48 If you produce one left shoe and one right shoe, you've got one pair of shoes, right?

00:09:58 If you produce two left shoes, and one right shoe, you still only produced one pair of shoes.

00:10:05 So, right angle suggests perfect compliments, they go together.

00:10:13 You have to produce two left shoes, and two right shoes if you wanna produce two pair of shoes.

00:10:20 You cannot produce any other combination, it has to be two of each.

00:10:28 Now, Luna would like to give you some highlights of these topics.

00:10:31 Production Possibilities Frontier.

00:10:33 Well, that identifies the potential combinations of two goods that can be produced whenever the available resources are employed efficiently.

00:10:42 Remember, employing resources efficiently means that we are producing on that production possibility frontier.

00:10:51 Employing resources efficiently means there is no way to increase the production of one good without decreasing the production of another.

00:11:01 Now Luna's got to go, she has to go back to chasing that cat.

00:11:07 Do appreciate you watching this video.

00:11:10 Hope it helped you and I do wish you luck in class.

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