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## Macroeconomics

### Course: Macroeconomics > Unit 1

Lesson 2: Opportunity cost and the Production Possibilities Curve- Production possibilities curve
- Opportunity cost
- Increasing opportunity cost
- PPCs for increasing, decreasing and constant opportunity cost
- Production Possibilities Curve as a model of a country's economy
- Lesson summary: Opportunity cost and the PPC
- Opportunity cost and the PPC

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# Production possibilities curve

The production possibilities curve (PPC) is a graph that shows all of the different combinations of output that can be produced given current resources and technology. Sometimes called the production possibilities frontier (PPF), the PPC illustrates scarcity and tradeoffs. We can model tradeoffs and scarcity using the example of a hunter-gatherer who can split their time between two activities. Created by Sal Khan.

## Want to join the conversation?

- Can't trading get you outside the curve?(60 votes)
- trading is not production so its not taken in this curve account(150 votes)

- I don't see why the amount of berries and rabbits couldn't go above the curve, but they could fall below it. You are assuming ceteris paribus. So all variables are the same, if you fall below the curve, Sall said that could be because you're not using equipment efficiently. But that's not assuming ceteris paribus. And if you're not assuming ceteris paribus, then you can get above the curve because you could find a way to work more efficiently.(25 votes)
- What you need to consider is that the frontier is assuming that you are working in the most efficient way. You simply cannot work harder, faster or more effectively with the resources you have. If you hold efficiency constant, when you are being as efficient as possible, then the only things you can change is how many berries or rabbits you get. If you get more rabbits you have to forgo some berries. This is known as Pareto efficiency or productive efficiency. You have to give something up to get something else.(108 votes)

- Why were the number of berries he got decreasing?(30 votes)
- Or you can think of it this way: Say there is a limited number of berries to pick within your village's area. As you pick more and more berries, there will be less berries out in the field for you to find so even though you spend more time looking for berries, you won't find more because there's only a set number of berries per area and the more you find the harder you have to look to find the remainder. That's one way of looking at it. Hope that helps.(46 votes)

- So far the PPF assumes a "two-goods" economy. If we wanted to visualize a "three-goods" economy, would the PPF have 3 axes (X, Y and Z) and the PPF would become a 3D curved surface originating from X=0, Y=0 and Z=0?(13 votes)
- This almost certainly begs the question, "What if a car maker such as Ford or GM wanted to decide how much of each car to produce?" They obviously have more than 3 models currently in production. Given that we do not have access to higher dimensions, how do these companies make such decisions?

As I ask this question, I realize that the model described above is extremely simplified. I'm just curious to know how this model is practically applied.(13 votes)

- How would unemployment in both industries/axes affect the PPF?(10 votes)
- Nothing would happen to the PPF with unemployment BUT the economy would be operating at a point inside the PPF. Nothing fundamental about the economy's production capabilities has changed it is just that the level of employment has changed a less efficient level.(14 votes)

- Trying to take this another step. If you knew something about the relative values or weights of the two goods, could you determine the slope of the line you would need to find the curve at to find the optimal point you would want to be?(6 votes)
- Typically speaking, distances on the axis are of the same relative value. In this scenario, assuming the distance between 0 and 5 rabbits along the X axis is equal to the distance of 0 and 300 berries on the Y axis, it would mean that 5 rabbits is equal in value (also known as "utility" in the business world) to 300 berries. Accordingly, when creating a PPF for a real life scenario, the distances on the axes between two different options, be they products, projects, etc. should represent an equality in their relative worth, or "utility". When this is properly done, you can use the PPF to find which combination of the two options would maximize utility.(7 votes)

- I don't understand what kind of scenario would give you half of a rabbit, or a quarter of a rabbit. Wouldn't the amount of rabbits/berries have to be natural numbers? He said that you could, for example, get 4.5 rabbits, and that would be on the graph. I don't understand how this is even possible.(5 votes)
- What's tricky is that on the one hand he's graphing a single day's work, but on the other hand he alludes to it being an average day's work. (The problem is that if you did nothing but berry-picking every day you would quickly pick ever berry there is, and then there would be no more. Vice-versa if you did nothing but rabbit-hunting, you would hunt the local stock to extinction.)

So you really have to think of it as the probable outcome of a single day's work for this one day. Ie, if we're going to toss a coin one time, only 0 or 1 heads or tails could happen, but you could still describe it fractionally as a .5 chance of heads and a .5 chance of tails. Likewise it's a probability of 4.5 rabbits**today**. But it's not really an average of 4.5 rabbits/day for the next year, because that might not be sustainable.

(Sal sort of glossed over things to try to make it simpler, but using hunter-gathering as the example makes the reality a bit odd, IMO.)(12 votes)

- you could also just get someone to do it for you(10 votes)
- what are some assumptions made by the ppf?(4 votes)
- It is simply assuming that if you were operating at maximum efficiency, these are the highest possible production combinations. It is a metric measuring the efficiency of a country's or firm's output, if you not reaching the plotted point amounts (which country's rarely do) then resources are not being maximized.(3 votes)

- What things would take us to the "impossible Point" I know that a new technology( new technique of hunting) would put us outside of the PPF but what else would put us there?(5 votes)
- Keep in mind that the PPF has a time component to it, so to reach a point outside the PPF we have to have a change in the future that increases our possible production.

One you already mentioned would be technology which increases the productivity of our existing resources.

The other would be if our available resources actually increased, e.g.:

A new worker shows up (increase in labor)

Rabbits become more plentiful (increase in "land")

We spend some time making a hunting weapon (investment that creates new capital)(4 votes)

## Video transcript

Let's say you're some
type of a hunter gatherer and you're trying to figure
out how much of your time to spend hunting and how much
of your time to spend gathering. So let's think about the
different scenarios here and the tradeoffs
that they involve. And just for
simplicity we're going to assume that when you're
talking about hunting, the only animal
around you to hunt for are these little rabbits. And when we're talking
about gathering, the only thing you can gather
are some type of berries. That'll keep our conversation
a little bit simpler. So let's think about
all of the scenarios. So first, let's call this
first scenario Scenario A. And let's say--
so let's call this the number of
rabbits you can get and then let's call this
the number of berries. Let's do this column as
the number of berries that you can get. So if you were to spend your
entire day going after rabbits, all your free time
out-- making sure you have time to
sleep, and get dressed, and all those type of things. Let's say that you can actually
get five rabbits, on average, in a given day. But if you spend all
your time getting rabbits you're not going to have
any time to get berries. So you're going to be
able to get 0 berries. Now let's say that you were
to allocate a little bit more time to get berries and a little
bit less time to get rabbits. So we'll call that
Scenario B. We'll call scenario B the reality
where you have enough time to get 4 rabbits on average. And when you do that,
all of a sudden you're able to get 100 berries. And when we do these
different scenarios, we're assuming that
everything else is equal. You're not changing
the amount of time you have either
hunting or gathering. You're not changing
the amount of sleep. You're not changing your
techniques for hunting rabbits, or hunting berries,
or you're not somehow looking to do other
things with your time. So all other things are equal. And the general term for
this, and it sounds very fancy if you were to say
it in a conversation, is ceteris paribus. Which literally means-- so any
time someone says, oh ceteris parabus, we assume
this variable changes or whatever else--
they're saying we're assuming everything
else is being held equal. So ceteris means
all other things. You're probably
familiar with et cetera. It's the same word, essentially. Other things in paribus,
other things equal. So when you're going
from Scenario A to Scenario B you're not
changing the amount of time you're sleeping. You're not changing
somehow the geography where you are in a dramatic way. You're not changing the tools
you use or the technology. Everything else is equal. The only variable
you're changing is how much time you
allocate to finding rabbits versus finding berries. So let's do some more scenarios
assuming ceteris paribus. So let me do Scenario C.
You could, on average, have enough time to get 3 rabbits. But if you get 3 rabbits
then all of a sudden you will to get-- or if
you're only getting 3 rabbits, you're now able to
get 180 berries. And let's do a couple more. I'm going to do
two more scenarios. So let's say Scenario D, if
you reduce the amount of time you spend getting rabbits
so you get 2 rabbits, now all of a sudden you
have enough time on average to get 240 berries. And then, let's say you
spend even less time hunting for rabbits, on average. Then you have even
more time for berries. And so you're able
to get to 280 berries and I'll do one
more scenario here. So let's say Scenario F-- and
let's call these the scenarios. Scenarios A through
F. So Scenario F is you spend all your
time looking for berries. In which case, on
average, you're going to be able to
get 300 berries a day. But since you have
no time for rabbits you aren't going
to get any rabbits. So what I want to
do is plot these. And on one axis I'll have
the number of rabbits. And on the other axis I'll
have the number of berries. So let me do it right over here. So this axis, I will call
this my rabbit axis, rabbits. And we'll start. That will be 0. And then this will
be 1, 2, 3, 4, and then that will be 5 rabbits. And then in this axis
I will do the berries. So this right over here,
let's make this 100 berries. This is 200 berries. And then this is 300 berries. And so this is my berries axis. Now let's plot these points,
these different scenarios. So first we have
Scenario A. Maybe I should've done all these
colors in that Scenario A color. Scenario A, 5
rabbits, 0 berries. We are right over there. That is Scenario A. Scenario B, 4
rabbits, 100 berries. That's right over there. That's 100 berries. So that is Scenario B. Scenario C, 3
rabbits, 180 berries. 3 rabbits, 180. Let's see this would be 150. 180 will be like
right over there. So 3, if you have
time for 3 rabbits you have time for about
180 berries on average. So this is Scenario C. And then
Scenario D we have in white. If you have time for 2 rabbits,
you have time for 240 berries. So that is right around there. So this is Scenario D. Actually, a little bit lower. So this would be 250, so 240 is
a little bit lower than that. So it'll be right over there. That is Scenario D. Scenario E, if you
have time for 1 rabbit, you have time for 280 berries. So that gets us
right about there. That is Scenario E. And then finally
Scenario F. You are spending all of your
time looking for berries. You have no time for rabbits. So all of your time for
berries, no time for rabbits. 0 rabbits, 300 berries. That's right over there. So this is Scenario F. So what all of these
points represent, these are all points-- now this
is going to be a fancy word, but it's a very simple idea. These are all points on
you, as a hunter gatherer, on your production
possibilities frontier. Because if we draw
a line-- I just arbitrarily picked
these scenarios. Although I guess you could on
average get 4 and 1/2 rabbits on average, on average
get 3 and 1/2 rabbits, and then you'd have a
different number of berries. So these are all points on
the different combinations between the trade offs
of rabbits and berries. So let me connect all of these. Let me connect them in a
color that I haven't used it. So let me connect them. And do you see-- this
should just be one curve. So I'll do it as a dotted line. It's easier for me to
draw a dotted curve than a straight curve. So this right over here,
this curve right over here, represents all the
possible possibilities of combinations of
rabbits and berries. I've only picked
certain of them, but you could have a
scenario right over here. Maybe we could call
that Scenario G, where on average the amount of
time you've allocated, on average you would
get 4 and 1/2 rabbits. So some days you would get 4
rabbits and every other day you would get 5
rabbits, so maybe it averages out to 4
and 1/2 rabbits. And then maybe it
looks like you would get about 50 berries
in that situation. So all of these
are possibilities. You don't have to just jump
from 4 rabbits to 5 rabbits. Or maybe in this scenario
you're spending 7 hours and in this scenario
you spend 8 hours. But you could spend
7 hours and a minute, or 7 hours and a second. So anything in
between is possible and all of those possibilities
are on this curve. So these five scenarios,
actually these six scenarios that we've talked
about so far these are just scenarios
on this curve. And that curve we call,
once again-- fancy term, simple idea-- our production
possibilities frontier. Because it shows all of
the different possibilities we can do, we can get. 3 rabbits, and 180 berries. 2 rabbits and 240 berries. What we cannot do is
something that's beyond this. So for example, we can't
get a scenario like this. So this right over here
would be impossible Let me scroll over to
the right a little bit. Let me scroll, see
my scrolling thing. OK, so this right over
here is impossible, this point right
over here where I'm getting 5 rabbits
and 200 berries. If I'm getting five rabbits,
I'm spending all my time on rabbits. I have no time for berries. Or another way to think about
it, if I'm getting 200 berries I don't have enough
time to get 5 rabbits. So this point is impossible. This point would be impossible. Any point that's on this side
of the curve is impossible. Now any point that's on
this side of the curve, you can kind of view
it as inside the curve, or below the curve, or to
the left of the curve-- all of these points right
over here are possible. All of these points
right over here are-- these points, for
example, it is very easy for me to get 1 rabbit and 200 berries. So that right over
there is possible. Now, is that optimal? No, because if I were
to really work properly, I could get many more berries. Or I could get more rabbits. If I have 200 berries, I
could get more rabbits. Or if I'm concerned, if
I only want one rabbit, I can get more berries. So this is possible. All of the points down
here are possible. But they aren't optimal. They are not efficient. So the points in here, we'll
say that they are not efficient. Maybe somehow I'm not using
my resources optimally to do this type of thing,
when I'm over here. Or maybe I'm just not
being optimally focused, or whatever it might be. If you're talking about
a factory setting, when you're talking
about maybe deciding to make one thing or
another, then maybe you just aren't using the
resources in an optimal way. Now all the points on the
frontier-- these are efficient. You're doing the
most you can do. Right now we're not
making any judgment between whether any
of these possibilities are better than any
other possibility. All we are saying
is that you are doing the most that you can do. Any of these things,
you are making the most use of your time.