Production possibilities frontier
Economic Growth through Investment How investing for capital formation can expand the production possibilities frontier (PPF)
Economic Growth through Investment
⇐ Use this menu to view and help create subtitles for this video in many different languages. You'll probably want to hide YouTube's captions if using these subtitles.
- In the last few videos we have been talking
- about the Production Possibilities Frontiers.
- A relatively static thing, something you couldn't change
- but you could move along.
- What I want to do in this video is
- think about maybe there are ways
- to change or expand the Production Possibilities Frontier.
- And to do that, let's assume that our little
- hunter-gatherer has decided to become a strict carnivore.
- So he's only focused on rabbits now.
- And his whole happiness in life is optimising
- the number of rabbits he can catch and eat in a given day.
- And so let's, on one axis, let's draw
- the number of rabbits that he can catch in a given day.
- So say it's 1, 2, 3, 4, 5, 6, 7, I can keep going on and on.
- So this right over here is rabbits
- that he can catch in a given day.
- But remember, he wants to optimise this.
- He wants to think about how he can increase
- his productivity in terms of the number of rabbits.
- And he knows, we will assume, he knows
- how to build rabbit traps.
- So now we are going to do a Production Possibilities Frontier,
- not between rabbits and berries,
- but between rabbits and building rabbit traps.
- So rabbit traps. Rabbit traps.
- So maybe some type of.. He is able to get twigs together
- and you know...he builds something...
- he puts the twigs together in a little thing.
- You know, it's a little box.
- That maybe he puts a little, I don't know,
- some type of carrot down over there.
- And then if the rabbit comes and takes the carrot,
- then the box falls on the rabbit or something like that.
- We do not have to go into the particulars of the actual trap.
- But he can also spend his time building rabbit traps.
- So let's say 1 rabbit trap, 2 rabbit traps and 3 rabbit traps.
- And let's say that we are going to hold all other things equal.
- Ceteris Paribus, so we are not worrying about other things.
- And as we will see in most introductory economics classes,
- whenever you do a Production Possibilities Frontier,
- you are only doing it with 2 dimensions.
- And so that's why you have a regular curve.
- You could have one with 3 dimensions,
- where you are doing a trade off between three things.
- But then you'd have to have a 3 dimensional graph.
- And essentially,
- the Production Possibilities Frontier would be a surface.
- But let's just focus on this right now.
- Maybe I will do surface in the future just for fun.
- So these are rabbit traps.
- And let's say that the Production Possibilities Frontier
- between the rabbit traps and rabbits
- looks something like this.
- He could spend all his time making rabbit traps
- but in that case he won't get any rabbits and
- he will probably starve and that wouldn't be a good scenario.
- Or he could spend all of his time hunting for rabbits
- and he would catch on average 5 rabbits per day.
- But that would leave him no time to make rabbit traps.
- So this is our current Production Possibilities Frontier.
- Let me just draw it.
- This is our current Production Possibilities Frontier.
- So I'll call this, 'P' - Production Possibilities Frontier.
- And I will put a little zero subscript there.
- That's our starting point.
- So he could sit anywhere over here and
- he would achieved productive efficiency
- anywhere on this curve,
- but as we saw if he just spent all of his time
- if he just spent all of his time doing this over here
- he will never get any rabbit traps and
- so he won't be able to change
- the Productive Possibility Frontier.
- But what happens if instead
- he decides that he does want to build rabbit traps?
- So he decreases the number of rabbits a day to four.
- And that allows him to make 1 rabbit trap per day.
- So he wants to hang out in this scenario.
- So every day that goes by,
- on average he is going to make four rabbits
- and he is going to build a rabbit trap.
- So what's going to happen?
- So as we go, maybe into the next period,
- he would now have a rabbit trap after just one day
- that he can use to help catch rabbits.
- So that will actually change
- the Production Possibilities Frontier.
- So if he makes this investment, it will actually allow him
- in a given amount of time to actually catch more rabbits.
- So if he does that, the Production Possibilities Frontier..
- Having a rabbit trap won't allow him
- to make more rabbit traps in a day.
- So the most rabbit traps he could make in a day
- is still going to be 3.
- But maybe now he can catch 6 rabbits a day.
- So it might look something like that.
- So now he could either stop making rabbit traps
- and catch 6 a day, just with that one rabbit trap he has,
- or he can continue, he can continue that
- and now actually he can catch 5 rabbits a day
- and still make 1 rabbit trap per day.
- And maybe he decides to do that.
- But it could be anywhere along
- this Production Possibilities Frontier.
- So he could say I am happy eating the 4 rabbits a day.
- I am going to make 2 rabbit traps now everyday.
- And now after another period he gets even more productive
- and so then the production.
- So let me call this one, this is after one day,
- Production Possibilities Frontier after one day.
- And then after two days
- let's say he did this scenario right over here.
- Now he's produced two rabbit traps. Obviously this is...
- Maybe I am exaggerating
- how quickly his productivity would grow.
- But maybe now the new Production Possibilities Frontier
- looks like, looks something like this.
- He now has two rabbit traps.
- So, or he may have two more rabbit traps.
- He already had one.
- So he now has three rabbit traps after two days.
- And so now if he wanted to devote himself purely
- to rabbit trapping, he could get 8 rabbits a day.
- Or he could do some combination in between.
- And actually this curve, this shouldn't go up at all.
- I do not want to give you the impression that
- it went up and then down. It just goes kind of straight,
- does something like that right over here.
- So this right over here,
- I will call this Production Possibilities Frontier 2.
- So what this hunter-gatherer is doing,
- in this scenario right here is,
- he is making an investment.
- He is accumulating capital. This right over: this is capital.
- He is choosing instead of to consume all of his resources.
- So there's two things he can do,
- he can either spend all of his time in pure consumption
- getting as many rabbits as possible in a day and
- then eating them all, pure consumption.
- Or he could reduce his consumption and then
- allocate some of his resources towards investment.
- So this right over here, this is an investment.
- It makes him more productive.
- This right over here is consumption.
- There is some base level of consumption he needs to survive
- but if he invests, it increases his overall productive capacity.
- So if you viewed him as an economy by himself,
- by investing, instead of consuming all of his resources
- by investing some of his resources and
- in this case his resources are his time, his expertise.
- By investing some of them,
- he is able to increase his productivity.
- And if you viewed him as an economy,
- he is experiencing ... Economic Growth.
- And so there are multiple types of investment and
- we will talk about these in multiple videos.
- In this case, he is doing Capital Accumulation.
- He is building tools that will make him more productive.
- Another type of investment, is essentially
- Technological Change, Technological Improvement,
- which will would actually make his tools even better.
- So he could have a..
- We can maybe draw another Production Possibilities Frontier
- between making rabbit traps and
- then doing R&D on inventing new types of rabbit traps.
- So he could decide on
- which of those two things he wants to decide between.
- But what I wanted you to just appreciate in this video is that,
- the Production Possibilities Frontier can change.
- You can become more productive
- if you do have investment in R&D or Capital Accumulation.
- And in this case that just happened to be Rabbit Traps.
Be specific, and indicate a time in the video:
At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
Have something that's not a question about this content?
This discussion area is not meant for answering homework questions.
Share a tip
When naming a variable, it is okay to use most letters, but some are reserved, like 'e', which represents the value 2.7831...
Have something that's not a tip or feedback about this content?
This discussion area is not meant for answering homework questions.
Discuss the site
For general discussions about Khan Academy, visit our Reddit discussion page.
Flag inappropriate posts
Here are posts to avoid making. If you do encounter them, flag them for attention from our Guardians.
- disrespectful or offensive
- an advertisement
- low quality
- not about the video topic
- soliciting votes or seeking badges
- a homework question
- a duplicate answer
- repeatedly making the same post
- a tip or feedback in Questions
- a question in Tips & Feedback
- an answer that should be its own question
about the site