1. eFarmer.us Example: Corn vs. Soybeans Production Possibilities Frontier A mathematical model which shows efficient combinations of output produced given available factors of production and unchanged technology Copyright 2012 eStudy.us michael.roberson@eStudy.us Corn Soybean Illustrates the use of assumptions Marginal decision making Opportunity Cost Increasing Opportunity Cost Sensitivity Analysis (Changing Assumptions)

2. eFarmer.us Fixed resources Technology unchanged Fully employed 100 acres One Tractor CornSoybeans 10,0000 8,0001,000 6,0002,000 4,0003,000 2,0004,000 05,000 Copyright 2012 eStudy.us michael.roberson@eStudy.us The opportunity cost of one bushel of soybean is two bushels of corn Assumptions 3,000 4,000 6,000 2,000 10,000 Corn Soybean 5,000 0 Production Possibilities Frontier Efficient Production

3. eFarmer.us Copyright 2012 eStudy.us michael.roberson@eStudy.us Failed to use all the resource (less than 100 acres of land) Corn Soybean 10,000 Efficient Unattainable Inefficient Can not achieve this combination of production with given resource and technology All points on the line (curve) represent efficient combinations of output (using all 100 acres of land) Scarcity limits an economy to points on or below the production possibilities curve Production Possibilities Frontier 5,000

4. eFarmer.us CornSoybeans 10,0000 9,5001,000 8,5002,000 6,5003,000 3,5004,000 05,000 Copyright 2012 eStudy.us michael.roberson@eStudy.us Corn Soybean 5,000 3,000 3,500 6,500 1,000 2,000 4,000 8,500 9,500 10,000 One Corn for One Soybean Three Corn for One Soybean Now the farmer faces increasing opportunity cost as he continues to add soybeans in production 2000  3000 6500  3500 1000 3000 SoybeansCorn 1000  2000 9500  8500 1000 Production Possibilities Frontier

5. eFarmer.us Suppose the farmer purchases more land Suppose the farmer purchases a new tractor improving technologically or Copyright 2012 eStudy.us michael.roberson@eStudy.us Corn Soybean 5,0003,000 3,500 6,500 1,0002,0004,000 8,500 9,500 10,000 Causes the production possibilities frontier to shift out allowing for the production of more corn and or soybean 6,000 12,000 Production Possibilities Frontier

6. eFarmer.us Suppose technology improves for soybean but not for corn Causes the production possibilities frontier to shift out for soybean but not for corn Copyright 2012 eStudy.us michael.roberson@eStudy.us A farmer producing only corn will see no value in the new technology. Corn 4,000 10,000 Soybean 5,0003,000 3,500 6,500 1,0002,000 8,500 9,500 A farmer producing only soybean will get full value from the technology. A farmer producing both will get some value from the technology. 6,0007,000 Production Possibilities Frontier

7. eFarmer.us Will new technology determine the combination of production? Copyright 2012 eStudy.us michael.roberson@eStudy.us Farmers can use less land to product 4,000 soybeans Corn 4,000 Soybean 3,500 Directing the remaining land to increase corn output from 3,500 to 6,800 Markets determine what to produce not technology Original combination 3,500 corn 4,000 soybeans Suppose the world only wants 4,000 soybeans. 6,800 Production Possibilities Frontier