Production Possibility Frontier Video Lecture - SSC CGL Tier 2 - Study

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 trade-offs 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 ten thousand 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-axis
so production possibility a up there
possibility B involves making at least
some pizza on the table a hundred
thousand pies but that means we only
have the resources to make nine thousand
robots as well there's also a
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 Shiller 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
Ricans want more homeland security and
more national defense without question
Democrats Republicans everybody wants it
but where are we going to get it let me
think about it if you're going to deploy
say our police forces to guard buildings
and bridges and airports what are they
gonna 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
six hundred forty thousand police
officers in this country and sure we
could get more but where are we gonna
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 Guardsmen 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 weekend warriors suddenly we
take him 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 two that economic
textbook writers started using guns and
butter to illustrate that there was a
trade-off 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 against a
pizza and robots if everyone in the
economy is toiling away in the robot
factory there will be no one left for
the parlor ok that's the first lesson of
the production possibilities curve the
economic notion of scarcity anything you
may cost 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 0 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 a hundred
thousand fewer pizzas or to put it
another way - a hundred thousand
pieces divided by 4,000 robots so the
first four thousand robots cost an
average of 25 pizzas per mechanical man
four thousand goes into a hundred
thousand twenty-five times since its - a
hundred thousand that means -
twenty-five the Maya sign simply says
this is a cost a subtraction from what
we had but look what happens when we go
from four thousand to seven thousand
robots this time we only get three
thousand more metal heads but to produce
them we still have to give up the
opportunity of making a hundred thousand
pepperoni specials so again - a hundred
thousand pizzas divided by a mere three
thousand 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 a
hundred thousand forgone pizzas
therefore the opportunity cost increases
again a hundred thousand pies divided by
two thousand cyborgs fifty pies per Borg
finally the last segment of the
production possibilities curve is the
cost list in terms of orders from
dominos the last thousand androids cost
the economy the same hundred thousand
pizzas but at a whopping rate of a
hundred pizzas per robot and if you
spend a little more time on this graph
you can see that the same increasing
opportunity costs work in Reverse the
first hundred thousand pizzas cost one
tenth of a droid per pizza the last
hundred thousand 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 axes 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 explained
at first we can move the resources that
actually tend to be better suited for
producing guns the people who we know
perhaps really good at putting together
I'm not sure what takes to produce guns
these days probably putting together
electronic circuitry we move those
people first over to production of guns
so we can start producing guns at fairly
low cost but as we try to produce move
move more and more away from food
towards guns then we're going to
eventually have to start to bring in the
people who really spend 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 gonna have to give
up more and more butter to get the same
incremental addition of guns and
similarly and 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
they talked about grabbing low-hanging
fruit well 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've
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 ten or fifteen
minutes to get it and a lot of equipment
and if you don't have a ladder yet
you've 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 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 low-hanging
fruit phenomenon so where are we thus
far the production possibilities curve
or frontier has Illustrated both the
idea of trade-offs 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