hi everyone welcome back to our second part of our chapter two discussion this is chapter two in mancu um and we're gonna be talking about thinking like an economist again so chapter two right we've started with chapter one um part one i'm sorry uh here's chapter his part two so we already talked about these bullet points right so the two hats that economists could wear one could be a scientist and one could be a policy advisor we talked briefly about models and how they work and why we use them even though we know that they're not perfect representations of the world remember george box all models are wrong but some are useful and then we talked about our first model that we'll encounter in the class the circular flow diagram which shows the flow of money of inputs right so labor or whatever and goods and services throughout the economy so that's model number one in this part and in actually the third part as well we're going to talk about a different model which is very important for not only for this chapter but for our discussion of trade the the value of trade between two countries which in fact is going to be our next chapter but we need to introduce this model which we call the production possibilities frontier sometimes you'll also hear me refer to it as the ppf all right so we'll see that this ppf is really all about opportunity cost that is the when we analyze this thing we'll see what we're doing is looking at the opportunity cost between two goods and how an economy might make the trade-off between producing less of one good more of one good and less of another right how does that trade off work uh we'll we'll get to you'll see how it works in a second all right so let's first define it right the production possibilities frontier again that's our second model it's a graph right as we'll see in the next couple of slides it's the way we draw it in a simplified model here in eco 110 principles of micro we see the graph as a straight line which makes the math very easy right you're just doing some basic geometry with slopes we're not using a ppf that is more bowed it looks like a part of a circle why because again the when we analyze a ppf we look at the slope of the line of the graph and a straight line has a constant slope and so the math to calculate that slope is very easy a a abode ppf that looks like again part of a circle does not have a constant slope so if i go from one point on the ppf to another point the slope of the curve at each of those points is going to be different and the math required to calculate that slope is much harder in fact it's calculus and i promised you we're not going to do any calculus in this class we're just going to stick with the basic algebra and geometry and so one part of that commitment is that we're going to use ppfs that have straight lines rather than bows but anyway the ppf what is it it's a graph that shows all the combinations of two goods an economy can produce and pay special attention to the underlying part there given the resources and technology available to it i want you to memorize that because um if you understand if you memorize it if you understand what it means right you will have no trouble doing these kinds of questions right or analyzing a ppf problem so again the ppf is a graph that shows all the combinations of two goods an economy can produce given the resources and technology available to it we'll again flesh that out as we go forward you'll see and it sounds like a bunch of words right now but as we go forward you see how it works it's a model as i say and it's really simple because again we're looking at the behavior of an economy or a firm right and we're pretending that this economy or this firm only makes two things right that's not the world the world in the world an economy makes thousands or millions or billions of products right and so our ppf that only shows two goods doesn't really come close to making to representing reality but think about this what if it did what if we tried well then we've got an extremely complicated model that nobody's going to be able to understand so we don't bother instead we use this simple model which again is not real but it tells us stuff about the behavior of economies and behavior firms what does it tell us it illustrates very clearly the trade-offs that firms face when they change the product mixture when they decide so buddy right buddy makes cakes and cupcakes he can only make so many cakes he can only make so many cupcakes given what's the definition the resources and technology available to him he only has so many ovens he only has so many eggs right he only has so many workers right if he decides to make to send everybody all those resources to make cakes well he can make a bunch of cakes right but if he instead decides one day to say well i want to make fewer cakes because i'm not selling them all right instead i'm noticing that people are calling me up and saying hey we want cupcakes well i might want to he might want to change the product mixture he might want to decide to make fewer cakes and more cupcakes right but what does that mean that means he's got to trade off the number of cakes he makes in favor of making more cupcakes he can't if since he's has to tell some worker to say hey don't make cakes anymore go make cupcakes that means that person is not available to make cakes and buddies going to produce fewer cakes that's not necessarily bad if the guy makes lots of cupcakes right and he can sell them for more but there's a trade-off right if you decide to make more of one good you have to give up some of the other right so that's what the ppf tries to show us right that trade-off between the two goods now um one thing i want to impress on you this is a useful model but it's not the end of the world it doesn't tell us everything and so sometimes students get a little confused because they give the ppf more credit than it deserves it only tells us one thing what the firm can make it doesn't tell us what they do make and it doesn't tell us what they should make those are two separate questions what that we'll deal with when we get to supply and demand right that's a couple of chapters from now right now we are content with the simple um lessons that the ppf teaches us which is it tells us what can be made right don't give it all kinds of mysterious qualities because it just doesn't deserve it it's not designed to teach you those kinds of things all right so let's do an example all right our productions possibility frontier so here's our assumptions right we have a little economy right let's say it's a country a tiny little country that makes two things computers and tomatoes why why not right i just picked those just because i felt like it right so our goods that our economy makes are computers and tomatoes and what does it have to make those computers and tomatoes what is its what are its inputs what are its factors of production again very simple i'm not going to worry about machines i'm not going to worry about factories i'm not going to worry about raw materials like seeds and and water for tomatoes or plastic and metal for computers i'm not worried about that i'm going to say the only thing we need to make both of these goods computers and tomatoes is labor people okay and we measure the labor available to us in the number of hours that people are available to work right and in our simple economy that we have people ready to work but we don't have an unlimited number of people we have 50 000 labor hours per month to use to make either computers or tomatoes or both now when we go through these examples i want you to have an image in your mind it's easiest this is the easiest way to explain or to understand what the choices are think of a big giant line of workers of employees in fact 50 000 employees are standing in line right each worker is available to work one hour and they're waiting for you as the boss to tell them what to do right all these people are standing in line 50 000 of them big giant line or i could last a mile right they're standing in line waiting for you to tell them what to do whether you should they should uh report to work and make computers whether they should report to make to work to make tomatoes right so you're going to tell them where to go whether to go to the computer factory or to the farm to make tomatoes right and again this is a simple model two goods one resource it's not a one input right one resource not the world that's okay you'll see it you'll you'll get enough out of this exercise to make it worthwhile all right so in our world right we again have a choice of making computers or tomatoes we know that making one computer requires 100 hours of labor so if i want to make a computer i find 100 people on that line of 50 000 employees and say okay go over there and make me a computer right i need 100 people to do that on the other hand i if i want to make tomatoes i can grow a ton of tomatoes 2 000 pounds with 10 workers so i might go to the next 10 people on the line and say okay go on to the f go to the farm and make me some tomatoes right so one computer requires a hundred hours of 100 people right one ton of tomatoes requires 10 people and so remember we're limited by how many people are on our line there are 50 000 people on the line so we have a combination with those 50 000 people we can choose to do a bunch of things right we can choose to make send all of the people on the line to the computer factory and make computers right we could alternatively take all the people on the line and tell them to go to the farm and make tomatoes or we can do something in between we can say make a bunch of computers and make a bunch of tomatoes grow a bunch of tomatoes right how much well it depends on what our choices are right so here is a table that explains very quickly five possible choices of goods to make right so row a right says that we are going we our economy chooses to make 500 computers and zero tomatoes how did i come up with that well remember fifty thousand uh people are waiting online there are fifty thousand hours of labor each computer requires a hundred hours so fifty thousand divided by a hundred i can make five hundred computers with the people available to me but that also means what that i've taken all the people on my line and and um directed them towards the factory right i made them make computers which means what the line is now empty there ain't nobody left to make tomatoes so under that choice choice a i can i devote all my resources to making computers i make zero tomatoes why there's just not anybody left the the other extreme is line e right where i say to those people all hey all you 50 000 people go to the farm and grow a bunch of tomatoes right so 50 000 people each a ton of tomatoes requires 10 hours of labor so 50 000 hours divided by 10 those people can now make 50 000 uh puns all right tons of tomatoes but notice also something uh happens here as well that since i sent everybody in line to go make tomatoes ain't nobody left to make computers and so we've reached our resource limit right we've used up all our people and so there's no one left to make computers so we make no computers right that's line e and then we can i can play right i can say well i'm going to make some computers but also some tomatoes right and there's different choices here well so if i make uh if i tell 40 000 workers to go make computers and the rest to make tomatoes well i can make 400 computers that's 40 000 divided by 100 and i can make a thousand tons of tomatoes which is 10 000 remaining workers divided by 10. and so on and so forth same thing with line c right 25 25 000 hours or people each right so that allows me to make 250 computers and 2500 tomatoes and in line d right i have 10 thousand workers making computers ten thousand divided behind by a hundred is a hundred right forty thousand uh workers are left uh forty thousand divided by ten is four thousand so i can make in that combination 100 computers and 4 000 tomatoes right so that's how the table set up right so we can show these choices in table form i could also graph them right so here's our first graph right which is a which is again a very tells us a lot right if a picture tell picture tells a talent a thousand words right so does a graph so here we have on the right side of your screen right the graph of our production possibility frontier which again shows different combinations of goods that this company this economy wants to make right on the left column going up and down what i would call the y-axis or the vertical axis we see the number of tons of tomatoes we can make right from 6000 down on the top end of the line down to zero on the bottom end of that vertical line right though the horizontal line right the y axis shows how many computers we can make again from 0 at the left part of the line to 600 at the right part of the line right so that's the setup now i can take those combination of goods that i developed in the last slide right computers and tomatoes and graph them right so point a 500 computers and zero tomatoes that tells me that uh my i make 500 computers so i am all the way over to the right on the horizontal the x-axis of my graph right all the way all the way over to the right but also at the same time i'm not making any compute any tomatoes so i am not my point that i'm graphing here right it's sitting right on top of the horizontal the x-axis because that line shows what happens when we make zero tomatoes right so point a is a combination of computers and tomatoes where i make 500 tomato 500 computers sorry and zero tomatoes the opposite extreme is the upper left part of our graph which was represented by point e what's going on there well we see we're not making any computers there's zero computers at that point right and so the y-axis right is well i'm sorry the x-axis is at zero that's the left um line and the vertical line that's what uh what that shows what where we are making zero compute zero computers but that doesn't mean we're not doing anything because the 50 000 workers that we have right are all making tomatoes so they're making five thousand tons of tomatoes right and the other three points point b point c point d also represent combinations choices that the firm makes for different combinations of computers and tomatoes so there we have our uh ppf that believe it or not is our ppf right that green line with the dots on them you'll see a couple of other dots on the graph we'll talk about those in a second but right now this is good enough to know that our ppf shows these five different choices about the combinations of goods that this com this economy wants to make right so there we go let's play with that a little bit so let's suppose instead of these combinations of goods right we want to make a different combination we want to make a hundred computers and three thousand tons of tomatoes right so the first question for you is can the economy do that do they have enough people to make this combination of goods right so how do you know how would you know what that is well you need to figure out how many people you need to make 100 computers and how many people you need to make 3 000 tons of tomatoes right add them together and compare that to the number of people you have available to produce stuff right that 50 000 person long line so let's do the math right 100 computers requ each computer requires 100 hours so 100 times 100 is 10 000 right 3 000 tons of tomatoes each ton of tomatoes tomatoes requires 10 hours right so 3 000 times ten is thirty thousand ten thousand hours required for computers thirty thousand hours required for tomatoes that's forty thousand do we have enough people to produce that much yes we do we have 50. right so we know that the economy can produce this combination of goods they can they have enough people to produce 100 computers and 300 tons of tomatoes right and we'll see when we go back to our slide we're going to label that point point f let's try another one right so instead of 300 compu 100 computers and 3 000 tons of tomatoes we've got a new choice right we're going to try to see whether we can make 300 computers and 3 500 tons of tomatoes right so same process how many hours does it make does it do do we need to make a computer a hundred and we're make trying to make 300 of them so 300 times 100 is 30 000 right for tomatoes we know it takes 10 hours to make a ton of tomatoes and we want to make 3 500 tons of them so 10 times 3 500 is 35 000 right so so 30 000 for computers 35 000 for tomatoes that's 65 000 um labor hours required 30 65 000 people can we do it no we only have 50 000 people available so we cannot make this combination of goods right it's we don't have enough people right so let's graph these things right so look let's look at point f if you remember right 100 computers 3 000 tons of tomatoes requires 40 000 hours of labor we see it here right that blue diamond there which i've labeled point f shows the that combination of tomatoes and computers we see that we can we we know we can do it we also see something else right that that that diamond point f right is on our graph but it doesn't sit on that green line that we drew before right that tells me something that tells me that the that combination is what we call inefficient not efficient what does that mean that means we're not using all the resources that our economy has to make things in fact we're leaving 10 000 people standing on that line waiting to be told what to do and ain't nobody nobody's going to tell them they're just sitting around or standing around looking at each other and standing idle they are not producing anything so while we can make this combination of goods right 300 computers and 3 000 tons of tomatoes we can do better we can be richer we can use we can consume more tomatoes and computers if we take those 10 000 people who are standing online and put them to work so high level lesson here if the point on your pdf ppf that you well if you're if the point on your ppf that you draw is inside or underneath the line right and here we see f is beneath our green line we say that the that combination of goods is possible but it's not efficient we could do better if we are smarter about it right so possible under the line possible not efficient i would write that down okay what about our next point what about point g well remember that is 300 computers and 3 500 tons of tomatoes we calculated that we need 65 000 hours of labor to do that and we can't do it because we only have 50 000 people ready to work so if we graph that we see that point g that sort of red thing with the red diamond we see that's we can graph it but we also see something else interesting it is to the right or above our line right so f is below to the left of the line that's possible but not efficient g point g isn't even possible we can't do it we can't do it we don't have enough people to produce that much so how do we get there well one simple thing is to get more workers right remember our definition combination of goods and services that economy can produce given the resources and technology technology available to it well under that definition we can do it if we give our economy or our firm more resources so one thing we have to do if we want if we really like this right we want to make this combination we want to make 300 computers and 3 500 tomatoes well we have to give our firms our companies more people to work with right we have to increase their resources but without doing that we can't do this we say this is not possible but because economists like to use fancy words we say it's not feasible same thing it's just economist talk right so point g is not feasible so again as i said in the last slide if it's below to the the line or to the left all right we say that's possible or feasible but not efficient and point g we don't even get to efficiency it's just you can't do it right it's not feasible above the line and to the right as far as the other con my uh points are concerned right a through e they are sitting on top of the line right they're sitting right on the line they're not below or to the left they're not above or to the right they're right on the line and that's where we want to be right because number one we know we calculated this already that we can make those uh that combination of goods right all computers and no tomatoes all tomatoes no computers right we can make it and by using those combinations right we have used all our people that are waiting online to work there's nobody left in my 50 000 person line they're all either in the computer factory or in the fields growing tomatoes we are efficient we are not leaving anybody standing around waiting for something to do all our resources are fully used right to make stuff right so where you want to be in our ppf is on the line right sit right on top of that line right so this is just a review right under the line point f right it's feasible but not efficient that means we're not using all our resources factories may be closed right workers the people on our line right maybe standing around not doing stuff right we can do it but we can be richer if we put those things to work right for point g we don't get to that right above the line like point g above and to the right we don't get too efficient it's not possible we need to rethink what we are doing either we um become a little less ambitious and don't try to make that combination of goods but instead make a smaller combination that works too right bring yourself within the number of people you have available to work or we can just give factories more people to work with right increase the resources but as now as of right now without doing those making those changes we can't do it right so let's summarize what we know so far about the ppf we're not done with it right but let's let's summarize what we've done so far right so again definition a ppf shows all combinations of two goods that a common an economy can produce given the resources and technology available to it right it can be used to illustrate trade-offs and opportunity costs we didn't get that yet get get there yet we'll get there in the next set of slides right but we'll see that one useful trick one useful lesson that a ppf teaches us is how we can calculate the the trade-offs between computers and tomatoes right so that's it for this set of slides um i'll be back at you shortly when when we take a much closer look at the ppf and use it to calculate opportunity cost all right talk to you soon