the production possibilities curve a big favorite of Economics textbooks for good reason the production possibilities curve or Frontier as it's sometimes called turns out to be a very simple way to illustrate four very important economic ideas first it's another demonstration that economics is based on the idea of scarcity of tradeoffs so imagine a fictitious economy somewhere that makes only two goods pizzas and robots for the sake of clarity economists like to make their models as simple as they can and it doesn't get much simpler than this anyway this economy's only two goods are about to be put up on a table which represents the trade-off between them devote all this simplified economy's resources to making robots and let's say it can make 10,000 of them but that means no pizza making just one pile of pizzas the table shows means making fewer robots and as more pizzas are made the possible number of robots is further reduced down to a situation of all pizzas and no robots at all put the different combinations on a graph and you've got the production possibilities Frontier in action so if you're willing to go without Pizza entirely that's zero down here on the x-axis but you can make a full 10,000 robots here on the Y AIS so production possibility a up there possibility B involves making at least some pizza on the table 100,000 pies but that means we only have the resources to make 9,000 robots as well there's also possibility C possibility D and this Frontier ends down at possibility e 400,000 pizzas no robots at all the picture looks the same for any two products the author of the economy today Brad Schiller if we want to look at production possibilities at work in a real setting just look at the issues that the United States is facing right now every public opinion poll shows that Americans want more Homeland Security and more National Defense without question Democrats Republicans everybody wants it but where are we going to get it I mean think about it if you're going to deploy say our police forces to guard buildings and bridges and airports what are they going to stop doing we're making a difficult choice so why don't we simply hire more police it would be wonderful if we had more police we already have 640,000 police officers in this country and sure we could get more but where are we going to get them from we have to take them out of some other industry we're having the same problem with the war in Iraq we have to we have to call up tens of thousands of national gmen who would otherwise be producing Goods in the civilian sector teaching schools working in construction working as accountants these are the National Guard who are weakend warriors suddenly we take them out of their civilian jobs in order to strengthen our National Defense we're making a choice we're moving resources from the production of butter civilian Goods to the production of guns our national security it was after World War II that economic textbook writers started using guns and butter to illustrate that there was a tradeoff between consumer goods like food and military hardware the reason behind the trade-off as Brad Schiller says is that you have to use finite resources like land labor and raw materials to make anything again say pizza and robots if everyone in the economy is toiling away in the robot Factory there will be no one left for the Parlor okay that's the first lesson of the production possibilities curve the economic notion of scarcity anything you make costs you the opportunity of doing something else with the same resources that is their opportunity cost the second lesson of the production possibilities curve is a little more subtle that the more you make of anything the greater its opportunity cost go from making zero robots to 4,000 of them and we get quite a payoff what does it cost us in terms of pizza the chart makes it clear 100,000 fewer pizzas or to put it another way minus 100,000 pieces divided by 4,000 robots so the first 4,000 robots cost an average of 25 piezas per mechanical man 4,000 goes into 100, 25 times since it's minus 100,000 that means minus 25 the minus sign simply says this is a cost a subtraction from what we had but look what happens when we go from 4,000 to 7,000 robots this time we only get 3,000 more metal heads but but to produce them we still have to give up the opportunity of making 100,000 pepperoni specials so again minus 100,000 pizzas divided by a mere 3,000 robots an opportunity cost of about 33 pizzas per robot and when we go from making 7,000 to 9,000 robots the extra 2,000 automatons still costs us 100,000 forgone pizzas therefore the opportunity cost increases again 100,000 pies divided by 2,000 cyborgs 50 pies per Borg finally the last segment of the production possibilities curve is the costliest in terms of orders from dominoes the last thousand Androids cost the economy the same 100,000 pizzas but at a whopping rate of 100 pizzas per robot and if you spend a little more time on this graph you you can see that the same increasing opportunity costs work in reverse the first 100,000 pizzas cost one tenth of a Droid per Pizza the last 100,000 cost four times as much thus the law of increasing opportunity cost but what's driving it why is the production possibilities Frontier concave to the origin meaning it bows out from the place the two axis meet like a cave or cavity it's because things tend to cost more to produce the more you produce of them again take the example of guns versus butter Economist Cecilia Conrad explains at first we can move the resources that actually tend to be better suited for producing guns the people who are you know perhaps really good at putting together I'm not sure what it takes to produce guns these days probably putting together electronic circuitry we move those people first over the production of guns so we can start producing guns at fairly low cost but as we try to produce move move more more and more away from food towards guns then we're going to eventually have to start to bring in the people who really spent all their life out on a farm somewhere farming and don't have any idea about how the industrial process works and aren't really adjusted to working on an assembly line and so the cost of getting the extra gun production is going to start to get higher and that means and that means that we're going to have to give up more and more butter to get the same incremental uh addition of guns and similarly going similarly going the other direction another way to look at it is that you use your cheapest resources before any others or to use an old economics cliche you pick the lowest hanging fruit first Economist Jim Clark they go for what you can get most easily for what has the lowest opportunity cost when I talk about grabbing low hanging fruit no it's just right there you just reach up and grab it and takes hardly any effort you didn't have to give up very much to get it if you want the fruit at the top of the tree you got to haul out this big ladder and climb all the way up and then maybe you can still reach it up at the top but it's going to take you 10 or 15 minutes to get it and a lot of equipment and if you don't have a ladder yet you got to build the ladder so you want to pick the alternative that's got the lowest cost in terms of other things that you have to give up so the the low hanging fruits the stuff that's easy to get in other words all producers start with the easy pickings now there are arguments about how true this is in every case for example aren't computer chips cheaper the more you make but in a competitive market economics assumes that opportunity costs rise with quantity because of the loow hanging fruit phenomenon so where are we thus far the production possibilities curve or Frontier has Illustrated both the idea of tradeoffs that is scarcity you can't have it all and the idea of increasing opportunity costs there remain two more key points about the Curve but we'll get to them in the next video