1. Production Possibilities Frontier1

2. Outline I. Introduction to Gilligan’s Island
A. Production Possibilities Table
B. Production Possibilities Frontier
II. Economic Concepts Illustrated with a PPF
A. Opportunity Cost
B. Scarcity
C. Productive Efficiency
D. Growth/Technology Change 2

3. 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)

4. 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?

5. 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?

6. 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.

7. 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.

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

9. Production Possibilities Table (Part I)
Huts
Radios
112
[The Whole Crew
Makes Huts]
[Professor Makes Radios
The Rest Make Huts] 98 7
[Professor and Maryanne
Make Radios, The Rest
Make Huts] 80 13

10. 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.
Remember -- you want to take the people who are best at making radios and not very good at making huts out of hut production and put them in radio production first.

11. 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.

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

13. Production Possibilities Frontier
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.

14. Production Possibilities Frontier
Quantity of Huts
Quantity of Radios 14

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

16. Production Possibilities Frontier
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

17. Production Possibilities Frontier
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

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

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

20. Production Possibilities Frontier Defined
Production Possibilities Frontier (PPF) - 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

21. Assumptions made in using a PPF
There are only 2 goods in the economy
Everything produced is consumed
Resources and technology are held constant

22. Concepts Illustrated by the PPF
Opportunity Cost
Constant
Increasing
Scarcity
Productive Efficiency
Growth

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

24. 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.

25. Per Unit Opportunity Cost in Gilligan’s Island
If the opportunity cost of making 7 radios is 14 huts, then the opportunity cost of making 1 radio must be 2 huts.
Most of the time when we are thinking about opportunity cost, it is easier to think of it in “per unit” terms. In other words, ask yourself “what is the opportunity cost of making one unit of a good or service?”

26. How to Find Per Unit Opportunity Cost
A simple way to find the per unit opportunity cost is to use the following equation:
Opportunity Cost of a
Good or Service Produced =
Units of Good or Service Forgone
Units of a Good or Serve Produced

27. Examples of Opportunity Cost on Gilligan’s Island
The Professor gave up making 14 huts for 7 radios. The opportunity cost of The Professor making a radio is 14/7 = 2 huts.
Maryanne gave up making 18 huts to produce 6 radios. The opportunity cost of Maryanne making a radio is 18/6 = 3 huts.
We can also find the opportunity cost of Maryanne making a hut = 6/18 = 1/3 of a radio.

28. Opportunity Cost and the PPF
Huts
120
Amount of Huts
Given Up 90
Amount of
Radios Gained 60 30
Radios 7 14 21 28 28

29. Opportunity Cost and the PPF
Huts
120 90
Amount of Huts
Given Up 60
Amount of
Radios Gained 30
Radios 7 14 21 28 29

30. Opportunity Cost and the PPF
We know that the opportunity cost of radios is huts given up divided by radios gained.
Graphically, that is the same thing as the vertical change divided by the horizontal change (if we ignore the negative sign). In other words, the opportunity cost of making a radio is the slope of the the PPF.

31. Increasing Opportunity Costs
If we compute the opportunity cost of making radios for each member of the crew we find the following opportunity costs:
Professor - 2
Maryanne - 3
Mister Howell - 4
Ginger - 5
Mrs. Howell - 6
The Skipper - 7
Gilligan - 8

32. Increasing Opportunity Cost
Opportunity Cost increased because we picked people who were best at radios to make radios first. Then we kept choosing the best radio maker from all of the hut makers until we we left with the worst radio maker, Gilligan.

33. Increasing Opportunity Cost (Cont.)
This is because different parts of our economy are better suited for making different things. When starting to produce something we are going to want to make it as cheaply as possible. In other words - giving up as little as possible of other things. That is why the first person who makes radios is the professor, since he has the lowest opportunity cost of making radios.

34. Increasing Opportunity Cost (Cont.)
Note that generally as we make more and more of a good, the opportunity cost of making it increases. This is called the “The Law of Increasing Opportunity Cost.”

35. Constant Opportunity Cost
If all of the crew are equally skilled at making huts and radios, then there are Constant Opportunity Costs
This means that the slope of the PPF is constant.

36. Constant Opportunity Cost
Huts
120
The opportunity cost of
making a radio is 6 huts.
This is true regardless of
what combination of
goods is produced. 90 60 30
Radios 7 14 21 28

37. 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

38. 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 PPF. If we are inside of the PPF, we could produce more of one good without producing less of another.
Consider the 3 points on the following graph:

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

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

41. 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.

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

43. 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 PPF.

44. 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 PPF

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

46. 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.

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

48. Technology Change
Note that the slope of the PPF changed - implying the opportunity cost changed
This is because it now takes less time to make a radio, which means we are giving up less huts each time we make a radio!

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

50. 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 PPF shifts out.

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