1. The Foundations of Microeconomics
Dianna DaSilva-Glasgow
Department of Economics
University of Guyana
14 September, 2017

2. The Foundations of Microeconomics (Production Possibilities Frontier)
Wk 3 Lectures I and II . . .
The Foundations of Microeconomics (Production Possibilities Frontier)

3. Scarcity
Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Just as each member of a household cannot get everything he or she wants, each individual in a society cannot attain the highest standard of living to which he or she might aspire.
All Rights Reserved
Dr. David P Echevarria

4. Why do we have Scarcity?
We have Unlimited Wants and Needs But Limited Resources Create Scarcity So we need to make Choices What to produce, How to Produce, For Whom to produce (tomorrow’s lesson)

5. Trade Offs
When you choose between two possible uses for a resource, giving up one alternative for another.

6. Trade off: Sleep vs. Study
Options
Benefit
Opportunity Cost
1 hour of extra study time
Grade of C on test
1 hour of sleep
2nd hour of extra study time
Grade of B on test
2 hours of sleep
3rd hour of extra study time
Grade of B+ on test
3 hours of sleep

7. Cadillacs and 1946
Opportunity cost of tank = 10 passenger autos
M5 Tank
Cadillac Coupe

8. Opportunity Costs
When you make a trade off, there are costs. The value of time, money, goods, and services given up in an economic choice. The #1 alternative is the Opportunity cost.

9. Opportunity Costs Opportunity cost of any choice
What we forego when we make that choice
Most accurate and complete concept of cost
Opportunity cost of a choice includes both explicit costs and implicit costs
Explicit cost—dollars actually paid out for a choice
Implicit cost—value of something sacrificed when no direct payment is made

10. Opportunity Cost and Society
All production carries an opportunity cost
To produce more of one thing
Must shift resources away from producing something else

11. Production Possibilities Frontiers (PPF)
The PPF is a valuable tool for illustrating the effects of scarcity and its consequences.
PPF is a curve showing all combinations of two goods that can be possibly produced
Given the available
Factors of production (labor, capital, materials)
Production technology (capital intensity)
Society’s choices are limited to points on or inside the PPF

14. Exercise: Plot the PPF Cupcakes: 0 2 6 10 14 18 22 26 28 30
A B C D E F G H I J
Cupcakes:
Robots:

15. PRODUCTION POSSIBILITIES
The PPF illustrates three features of production possibilities
Attainable and unattainable combinations
Full employment and unemployment
Tradeoffs

16. PRODUCTION POSSIBILITIES
Attainable and Unattainable Combinations
We can produce at any point inside the PPF or on the frontier.
Points outside the PPF such as point G are unattainable.
Because the PPF shows the limits to production, it separates attainable combinations from unattainable ones.

17. Points outside the the PPF are not feasible with existing resources.
Pizza
Beer .A

18. All points on the curve correspond to full use of resources.
Pizza
Beer A B

19. PRODUCTION POSSIBILITIES
Full Employment and Unemployment
Full employment occurs when all the available resources are being used. Unemployment occurs when some resources are available but are not used.
When resources are fully employed, production occurs at points on the PPF such as D and E.
When resources are unemployed, production occurs at a point inside the PPF such as point H.
Production Possibilities and Comparative Advantage

20. PRODUCTION POSSIBILITIES
Tradeoffs
A tradeoff is a constraint or limit to what is possible that forces an exchange or a substitution of one thing for something else.
When production is on the PPF, we face a tradeoff. To get more of one good we must forgo some of the other good as we move along the PPF.
Production Possibilities and Comparative Advantage

21. Figure 1: The Production Possibilities Frontier
Number of Lives Saved per Period
Quantity of All Other Goods per Period
100,000
200,000
300,000
400,000
500,000
1,000,000
950,000
850,000
700,000
At point A, all resources are used for "other goods." A
Moving from point A to point B requires shifting resources out of other goods and into health care. B C D
At point F. all resources are used for health care. W E F

22. Increasing Opportunity Cost
According to the law of increasing opportunity cost
The more of something we produce the greater the opportunity cost of producing even more of it.
The law of increasing opportunity cost is reflected in the shape of the PPC. The curve is bowed out from the origin of the graph.

23. A typical PPF has the following shape:.
Pizza
Beer
The curve has a negative slope.
The curve is concave to the origin.

24. Concave shape, increasing opportunity costs.
Beer given up, the opportunity cost, is increasing
Pizza
Beer

25. PRODUCTION POSSIBILITIES
The PPF and Opportunity Cost: Illustration

26. PRODUCTION POSSIBILITIES
The PPF and Opportunity Cost: Illustration

27. Consider a straight line PPF
Beer given up, the opportunity cost, remains constant
Beer
Pizza

28. Efficiency and the Production Possibility Frontier
The PPF shows choices which are -- efficient (exactly on the frontier) -- inefficient (within the frontier)

29. Periods of unemployment or inefficiency in production correspond to points under the PPF.
Pizza
Beer .A

30. Full production implies two kinds of efficiency, productive efficiency and allocative efficiency.
Productive efficiency is the production of any particular mix of goods and services in the least costly way.
While, allocative efficiency is the production of that particular mix of goods and services most wanted by society.

31. The PPF and Growth The PPF assumes;
Fixed Resources – the available supply of factors of production are fixed in both quantity and quality. Nevertheless, they can be reallocated, within limits, among different uses.
Fixed Technology – the state of technology does not change.
These assumptions imply that we are looking at an economy at a certain point in time or over a very short period of time.

32. The PPF and Growth Productivity
The PPF will shift outward due to
Growth in resources
Population growth increases the supply of labour
Productivity growth due to increased skills of labour force
Increase in capital stock
Improvements to land
Technological advancement
Improvement in machinery and equipment
G. Mankiw

34. A shift in the production possibilities frontier3
A shift in the production possibilities frontier
Quantity of
Computers
Produced
A technological advance in the computer industry enables the economy to produce more computers for any given number of cars. As a result, the production possibilities frontier shifts outward. If the economy moves from point A to point G, then the production of both cars and computers increases.
4,000
1,000
3,000 G
2,300
2,200
650 A
600
Quantity of
Cars Produced

35. PRODUCTION POSSIBILITIES
The PPF and Economic Growth
A country that chooses point A, representing a relatively high level of current consumption and a relatively low level of investment, sees its future PPF shift out to PPF 2010 with A.
A country that chooses point B, representing a relatively lower level of current consumption and a relatively higher level of investment, sees its future PPF shift out to PPF 2010 with B.

36. The PPF and Growth Productivity
The PPF will shift inward due to
Decrease in population (due to disease, war etc.)
Loss of land
Decrease in productivity due to aging population, poor health etc.
G. Mankiw