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P roduction P ossibilities F rontiers

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

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  1. ProductionPossibilitiesFrontiers Rick Weber See also: http://www.rick-weber.com/EC101/tag/ppf/

  2. 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

  3. 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

  4. 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!

  5. 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”).

  6. 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!

  7. 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.

  8. Buying Fish and Coconuts • Fish costs $9.99 each • Coconuts cost $3.33 each • You have $50

  9. 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.

  10. 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.

  11. 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

  12. 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.”

  13. 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.

  14. 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)

  15. 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!

  16. 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

  17. 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

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