Production Possibilities Curve 1

Gilligan’s Island Recall that in the Gilligan’s TV show there are seven people stranded on a desert island: Gilligan, The Skipper, Maryanne, Ginger, Mr and Mrs. Howell, and the Professor. Assume that they only produce two things - huts (from Palm trees) and radios (from coconuts)

Production Possibilities (per month) If everyone is making huts they can produce 112 huts in one month and implicitly no radios. Let’s say they figure that it’s probably a good idea to make some radios. Who do they ask to stop making huts?

Who? The Professor Because he has been trained to do this and is not all skilled in hut production. So now the crew can make 7 radios and 98 huts in a month. What if they want to make more radios - who do they ask to do it?

When the professor moves from hut production to radio production how many fewer huts can the group now make? iRespond Question F Multiple Choice A.) 10 B.) 12 C.) 14 D.) 16 E.)

Who Next? Whomever is next best at making radios relative to making huts - let’s say that is Maryanne. If Maryanne and the Professor are making radios, then the crew can produce 13 radios and 80 huts in a month.

When Maryanne moves to producing radios how many fewer huts can the group now make? iRespond Question F Multiple Choice A.) 14 B.) 16 C.) 18 D.) 20 E.)

Three Production Possibilities At this point we have three production possibilities for the crew. One in which they all make huts, one where all but the Professor make huts, and one where the Professor and Maryanne make radios and the rest make huts. Let’s look at this information in a table.

Production Possibilities Table Production Possibilities Table - shows all combinations of goods and services that can be produced given the resources and technology of society.

The Rest of the Crew Now, let’s consider what would happen if, one by one, the rest of the crew moved into radio production from hut production.

Who Next? First the Mr. Howell, then Mrs. Howell, then Ginger, then The Skipper, and lastly - of course would be Gilligan, since he is probably the worst at making radios. Let’s see how we might include each of these production possibilities in our table.

Production Possibilities Table (Complete) Huts Radios 112 98 7 80 13 60 18 40 22 22 25 8 27 28

Production Possibilities Curve This table let’s us know how much our island economy can produce. Now, let’s try to get a graphical sense of these possibilities. To do this we to measure the quantity of each good on the x and y axes.

Production Possibilities Curve Quantity of Huts Quantity of Radios 14

Production Possibilities Curve Huts 120 90 60 30 Radios 7 14 21 28 15

Production Possibilities Curve Huts 120 90 This is the first line in the table - where there are no radios and 112 huts produced 60 30 Radios 7 14 21 28 16

Production Possibilities Curve Huts 120 90 This is the second line in the table - where there are 7 radios and 98 huts produced 60 30 Radios 7 14 21 28 17

Production Possibilities Curve Huts These are all of the production possibilities from our table 120 90 60 30 Radios 7 14 21 28 18

Production Possibilities Curve Huts When we connect the points we have the “Production Possibilities Frontier” 120 90 60 30 Radios 7 14 21 28 19

Production Possibilities Curve Defined Production Possibilities Curve (PPC) - graph that shows all combinations of goods and services that can be produced given the resources of society and the existing state of technology 20

Assumptions made in using a PPC Resources and technology are held constant

Opportunity Cost Opportunity Cost - the next best alternative forgone when a resource is used. “There is no such thing as a free lunch.”

Opportunity Cost in Gilligan’s Island When The Professor makes 7 radios, he is using his labor - a resource. That labor could have been used to make something else, specifically, it could have made 14 huts. Thus the opportunity cost of making the first 7 radios is 14 huts.

Scarcity Huts Since we have scarce resources, i.e. only 7 people, we are limited in what we can produce. We cannot make 60 huts and 28 radios. 120 90 60 30 Radios 7 14 21 28 37

According to the Scarcity graph on the previous slide which combination would be impossible? iRespond Question F Multiple Choice A.) 90 huts and 7 radios B.) 60 huts and 18 radios C.) 90 huts and 14 radios D.) E.)

Productive Efficiency In order to be productively efficient, our economy must not be able to produce more of one good without producing less of another. In other words, we must be on the PPC. If we are inside of the PPC, we could produce more of one good without producing less of another. Consider the 3 points on the following graph:

Productive Efficiency Huts 120 90 60 A B C 30 Radios 7 14 21 28 39

Which point would represent a point where we are producing efficiently and doing the best we can? iRespond Question A.) A B.) B C.) C D.) E.)

Which point would represent a situation where we are not producing what we are capable of? iRespond Question F Multiple Choice A.) A B.) B C.) C D.) E.)

Which point is impossible? iRespond Question F Multiple Choice A.) A B.) B C.) C D.) E.)

Productive Efficiency Point A cannot be productively efficient since we can increase production of radios from 7 to 18 while still producing 60 huts.

Productive Efficiency (Cont.) Point B is efficient since if we want to increase production of radios from 18 to 28, we must decrease our hut production from 60 to 0.

Productive Efficiency (Cont.) Point C is impossible, since no matter how we juggle our resources, we cannot produce that much. It is outside of our PPC.

Growth We all remember the special Gilligan’s Island movie where the Harlem Globetrotters’ (a very cool basketball team) plane crashed on the island. The episode involved a game for control of the world, but that is another story! For our purposes, let’s consider what would happen to our PPC.

What do you think will happen to our curve? iRespond Question F Multiple Choice A.) Stay the same B.) Shift inwards C.) Shift outwards D.) E.)

Growth (Cont.) Now we have 10 more people who can produce huts and radios. If we assume that opportunity costs don’t change, then we can model this as a shifting out of the PPC.

Growth Huts 120 New PPC 90 60 30 Radios 7 14 21 28 45

Changes in Technology What if a book called “How to Make Radios Out of Coconuts in Half the Time!” washes up on shore? Everyone can now make radios faster. This is a change in the technology of radio production. While this does not allow us to make more huts, we can make more radios with the same resources.

Technology Change Huts 120 New PPC 90 60 30 Radios 7 14 21 28 47

How Does This Apply to The Real World? Gilligan’s Island is not real but the lessons from it are very real. Our economy has thousands of goods, but we have a PPC like the crew has except instead of two axes for two goods, our PPC has many more axes.

Real World (Cont.) Our economy has opportunity costs - a recent article pointed out that all of the money spent on new sports stadiums in the last 5 years could refurbish every elementary and secondary public school in the country. Our economy has growth - when the population grows or new resources are discovered the PPC shifts out.

Real World (Cont.) Our economy faces technology changes - when the assembly line was invented we could make many goods faster. This moved our PPC much in the same way as it did in the example on Gilligan’s Island.