What is the purpose of a Production Possibilities Graph?

Video transcript

Let's say you're some sort of a hunter gatherer and also you're attempting to determine how a lot of your time to spend looking and the way a lot of your time to spend gathering. So let's take into consideration the totally different situations right here and the tradeoffs that they contain. And only for simplicity we're going to imagine that if you're speaking about looking, the one animal round you to hunt for are these little rabbits. And once we're speaking about gathering, the one factor you possibly can collect are some sort of berries. That'll maintain our dialog a bit of bit less complicated. So let's take into consideration the entire situations. So first, let's name this primary situation Situation A. And let's say– so let's name this the variety of rabbits you will get after which let's name this the variety of berries. Let's do that column because the variety of berries which you can get. So if you happen to have been to spend your total day going after rabbits, all of your free time out– ensuring you might have time to sleep, and dress, and all these sort of issues. Let's say which you can really get 5 rabbits, on common, in a given day. However if you happen to spend all of your time getting rabbits you're not going to have any time to get berries. So that you're going to have the ability to get 0 berries. Now let's say that you just have been to allocate a bit of bit extra time to get berries and a bit of bit much less time to get rabbits. So we'll name that Situation B. We'll name situation B the fact the place you might have sufficient time to get 4 rabbits on common. And if you try this, swiftly you're in a position to get 100 berries. And once we do these totally different situations, we're assuming that all the things else is equal. You're not altering the period of time you might have both looking or gathering. You're not altering the quantity of sleep. You're not altering your methods for looking rabbits, or looking berries, otherwise you're not someway seeking to do different issues together with your time. So all different issues are equal. And the overall time period for this, and it sounds very fancy if you happen to have been to say it in a dialog, is ceteris paribus. Which accurately means– so any time somebody says, oh ceteris parabus, we assume this variable adjustments or no matter else– they're saying we're assuming all the things else is being held equal. So ceteris means all different issues. You're in all probability acquainted with et cetera. It's the identical phrase, primarily. Different issues in paribus, different issues equal. So if you're going from Situation A to Situation B you're not altering the period of time you're sleeping. You're not altering someway the geography the place you’re in a dramatic manner. You're not altering the instruments you utilize or the expertise. All the pieces else is equal. The one variable you're altering is how a lot time you allocate to discovering rabbits versus discovering berries. So let's do some extra situations assuming ceteris paribus. So let me do Situation C. You may, on common, have sufficient time to get 3 rabbits. However if you happen to get 3 rabbits then swiftly you’ll to get– or if you happen to're solely getting 3 rabbits, you're now in a position to get 180 berries. And let's do a pair extra. I'm going to do two extra situations. So let's say Situation D, if you happen to cut back the period of time you spend getting rabbits so that you get 2 rabbits, now swiftly you might have sufficient time on common to get 240 berries. After which, let's say you spend even much less time trying to find rabbits, on common. Then you might have much more time for berries. And so that you're in a position to get to 180 berries and I'll do yet another situation right here. So let's say Situation F– and let's name these the situations. Eventualities A by F. So Situation F is you spend all of your time on the lookout for berries. During which case, on common, you're going to have the ability to get 300 berries a day. However since you haven’t any time for rabbits you aren't going to get any rabbits. So what I wish to do is plot these. And on one axis I'll have the variety of rabbits. And on the opposite axis I'll have the variety of berries. So let me do it proper over right here. So this axis, I’ll name this my rabbit axis, rabbits. And we'll begin. That will likely be 0. After which this will likely be 1, 2, 3, 4, after which that will likely be 5 rabbits. After which on this axis I’ll do the berries. So this proper over right here, let's make this 100 berries. That is 200 berries. After which that is 300 berries. And so that is my berries axis. Now let's plot these factors, these totally different situations. So first now we have Situation A. Perhaps I ought to've achieved all these colours in that Situation A coloration. Situation A, 5 rabbits, 0 berries. We’re proper over there. That’s Situation A. Situation B, 4 rabbits, 100 berries. That's proper over there. That's 100 berries. So that’s Situation B. Situation C, 3 rabbits, 180 berries. 3 rabbits, 180. Let's see this could be 150. 180 will likely be like proper over there. So 3, when you have time for 3 rabbits you might have time for about 180 berries on common. So that is Situation C. After which Situation D now we have in white. When you have time for two rabbits, you might have time for 240 berries. So that’s proper round there. So that is Situation D. Truly, a bit of bit decrease. So this could be 250, so 240 is a bit of bit decrease than that. So it'll be proper over there. That’s Situation D. Situation E, when you have time for 1 rabbit, you might have time for 280 berries. In order that will get us proper about there. That’s Situation E. After which lastly Situation F. You’re spending your entire time on the lookout for berries. You don’t have any time for rabbits. So your entire time for berries, no time for rabbits. 0 rabbits, 300 berries. That's proper over there. So that is Situation F. So what all of those factors characterize, these are all points– now that is going to be a flowery phrase, but it surely's a quite simple concept. These are all factors on you, as a hunter gatherer, in your manufacturing prospects frontier. As a result of if we draw a line– I simply arbitrarily picked these situations. Though I assume you could possibly on common get 4 and 1/2 rabbits on common, on common get 3 and 1/2 rabbits, and then you definitely'd have a unique variety of berries. So these are all factors on the totally different combos between the commerce offs of rabbits and berries. So let me join all of those. Let me join them in a coloration that I haven't used it. So let me join them. And do you see– this could simply be one curve. So I'll do it as a dotted line. It's simpler for me to attract a dotted curve than a straight curve. So this proper over right here, this curve proper over right here, represents all of the doable prospects of combos of rabbits and berries. I've solely picked sure of them, however you could possibly have a situation proper over right here. Perhaps we may name that Situation G, the place on common the period of time you've allotted, on common you’ll get 4 and 1/2 rabbits. So some days you’ll get 4 rabbits and each different day you’ll get 5 rabbits, so perhaps it averages out to 4 and 1/2 rabbits. After which perhaps it appears such as you would get about 50 berries in that scenario. So all of those are prospects. You don't have to only bounce from 4 rabbits to five rabbits. Or perhaps on this situation you're spending 7 hours and on this situation you spend 8 hours. However you could possibly spend 7 hours and a minute, or 7 hours and a second. So something in between is feasible and all of these prospects are on this curve. So these 5 situations, really these six situations that we've talked about up to now these are simply situations on this curve. And that curve we name, as soon as again– fancy time period, easy idea– our manufacturing prospects frontier. As a result of it reveals the entire totally different prospects we will do, we will get. 3 rabbits, and 180 berries. 2 rabbits and 240 berries. What we can not do is one thing that's past this. So for instance, we will't get a situation like this. So this proper over right here could be not possible Let me scroll over to the fitting a bit of bit. Let me scroll, see my scrolling factor. OK, so this proper over right here is not possible, this level proper over right here the place I'm getting 5 rabbits and 200 berries. If I'm getting 5 rabbits, I'm spending all my time on rabbits. I’ve no time for berries. Or one other manner to consider it, if I'm getting 200 berries I don't have sufficient time to get 5 rabbits. So this level is not possible. This level could be not possible. Any level that's on this aspect of the curve is not possible. Now any level that's on this aspect of the curve, you possibly can form of view it as contained in the curve, or beneath the curve, or to the left of the curve– all of those factors proper over listed below are doable. All of those factors proper over right here are– these factors, for instance, it is vitally straightforward for me to get 1 rabbit and 200 berries. In order that proper over there’s doable. Now, is that optimum? No, as a result of if I have been to actually work correctly, I may get many extra berries. Or I may get extra rabbits. If I’ve 200 berries, I may get extra rabbits. Or if I'm involved, if I solely need one rabbit, I can get extra berries. So that is doable. The entire factors down listed below are doable. However they aren't optimum. They aren’t environment friendly. So the factors in right here, we'll say that they don’t seem to be environment friendly. Perhaps someway I'm not utilizing my assets optimally to do one of these factor, after I'm over right here. Or perhaps I'm simply not being optimally centered, or no matter it is likely to be. For those who're speaking a couple of manufacturing unit setting, if you're speaking about perhaps deciding to make one factor or one other, then perhaps you simply aren't utilizing the assets in an optimum manner. Now all of the factors on the frontier– these are environment friendly. You're doing probably the most you are able to do. Proper now we're not making any judgment between whether or not any of those prospects are higher than some other risk. All we’re saying is that you’re doing probably the most that you are able to do. Any of these items, you make probably the most use of your time.


Deciphering the PPF

The PPF is graphically depicted as an arc, with one commodity represented on the X-axis and the opposite represented on the Y-axis. Every level on the arc reveals probably the most environment friendly variety of the 2 commodities that may be produced with out there assets.

Economists use PPFs to exhibit that an environment friendly nation produces what it’s most able to producing and trades with different nations for the remaining.

For instance, if a non-profit company offers a mixture of textbooks and computer systems, the PPF could present that it might produce both 40 textbooks and 7 computer systems, or 70 textbooks and three computer systems. The company’s management should decide which merchandise is extra urgently wanted. On this instance, the opportunity cost of manufacturing an extra 30 textbooks equals 4 computer systems.

How Can the PPF Be Utilized in Enterprise?

A PPF reveals companies a strategy to make sense of their manufacturing prospects by charting out the chance value of useful resource allocation, suggesting learn how to attain optimum allocative effectivity. With scarce assets, it tells us which merchandise to prioritize and at what ratio, displaying the utmost doable combos of products and companies

However, for all of its utility, it is very important do not forget that the PPF remains to be a theoretical assemble, not an precise illustration of actuality. It is very important do not forget that an economic system solely prices on the PPF curve theoretically; in actual life, companies and economies are in a relentless battle to reach at after which keep optimum manufacturing capability.

Study extra about economics and society in Paul Krugman’s MasterClass.

How the Manufacturing Prospects Curve Works

The manufacturing risk curve portrays the price of society’s alternative between two totally different items.An economic system that operates on the manufacturing risk frontier, or the very fringe of this curve, has the best standard of living it might obtain, as it’s producing as a lot as it might utilizing its assets. If the quantity produced is contained in the curve, then the entire assets are usually not getting used. On the chart above, that’s level E.

One doable motive for such an inefficiency could possibly be a recession or depression. If that happens, there’s not sufficient demand for both good. Layoffs could happen as effectively, leading to decrease ranges of labor getting used and due to this fact lowered manufacturing.

Different causes for an inefficient manufacturing generally is a bit extra difficult. An economic system will fall throughout the curve when it ignores its comparative advantage. For instance, Florida has the best surroundings to develop oranges, and Oregon’s local weather is greatest for apples. Florida has a comparative benefit in orange manufacturing, and Oregon has one in apple manufacturing. If Florida ignored its benefit in oranges and tried to develop apples, it will create an inefficient use of assets. The U.S. economic system could be working throughout the curve, resulting in a lower in lifestyle.

On the identical time, any level exterior the manufacturing prospects curve is not possible. Extra of each items can’t be produced with the restricted assets. On the chart above, that’s level F.

The Form of the Manufacturing Prospects Curve

The manufacturing risk curve bows outward. The very best level on the curve is if you solely produce one good, on the y-axis, and nil of the opposite, on the x-axis. On the chart, that’s Level A, the place the economic system produces 140,000 apples and nil oranges.

The widest level is if you produce not one of the good on the y-axis, producing as a lot as doable of the great on the x-axis. On the chart, that’s level D: The society produces zero apples and 40,000 oranges.

All of the factors in between are a trade-off of some mixture of the 2 items. An economic system operates extra effectively by producing that blend. The reason being that each useful resource is healthier suited to producing one good over one other. Some land is healthier suited to apples, whereas different land is greatest for oranges. Society does greatest when it directs the manufacturing of every useful resource towards its specialty. The extra specialised the assets, the extra bowed-out the manufacturing risk curve.


Under are 5 questions on this idea. Select the one greatest reply for every query and remember to learn the suggestions given. Click on “subsequent query” to maneuver on when prepared.

Comparative Benefit and the Manufacturing Prospects Curve

To assemble a mixed manufacturing prospects curve for all three crops, we will start by asking what number of pairs of skis Alpine Sports activities may produce if it have been producing solely skis. To seek out this amount, we add up the values on the vertical intercepts of every of the manufacturing prospects curves in Figure 2.4 “Production Possibilities at Three Plants”. These intercepts inform us the utmost variety of pairs of skis every plant can produce. Plant 1 can produce 200 pairs of skis per thirty days, Plant 2 can produce 100 pairs of skis at per thirty days, and Plant 3 can produce 50 pairs. Alpine Sports activities can thus produce 350 pairs of skis per thirty days if it devotes its assets solely to ski manufacturing. In that case, it produces no snowboards.

Now suppose the agency decides to provide 100 snowboards. That may require shifting one among its crops out of ski manufacturing. Which one will it select to shift? The smart factor for it to do is to decide on the plant wherein snowboards have the bottom alternative value—Plant 3. It has a bonus not as a result of it might produce extra snowboards than the opposite crops (all of the crops on this instance are able to producing as much as 100 snowboards per thirty days) however as a result of it’s the least productive plant for making skis. Producing a snowboard in Plant 3 requires giving up simply half a pair of skis.

Economists say that an economic system has a comparative advantage in producing a very good or service if the chance value of manufacturing that good or service is decrease for that economic system than for some other. Plant 3 has a comparative benefit in snowboard manufacturing as a result of it’s the plant for which the chance value of further snowboards is lowest. To place this by way of the manufacturing prospects curve, Plant 3 has a comparative benefit in snowboard manufacturing (the great on the horizontal axis) as a result of its manufacturing prospects curve is the flattest of the three curves.

Determine 2.5 The Mixed Manufacturing Prospects Curve for Alpine Sports activities The curve proven combines the manufacturing prospects curves for every plant. At level A, Alpine Sports activities produces 350 pairs of skis per thirty days and no snowboards. If the agency needs to extend snowboard manufacturing, it can first use Plant 3, which has a comparative benefit in snowboards.

Plant 3’s comparative benefit in snowboard manufacturing makes a vital level concerning the nature of comparative benefit. It needn’t indicate {that a} explicit plant is very good at an exercise. In our instance, all three crops are equally good at snowboard manufacturing. Plant 3, although, is the least environment friendly of the three in ski manufacturing. Alpine thus offers up fewer skis when it produces snowboards in Plant 3. Comparative benefit thus can stem from an absence of effectivity within the manufacturing of another good fairly than a particular proficiency within the manufacturing of the primary good.

The mixed manufacturing prospects curve for the agency’s three crops is proven in Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports”. We start at level A, with all three crops producing solely skis. Manufacturing totals 350 pairs of skis per thirty days and nil snowboards. If the agency have been to provide 100 snowboards at Plant 3, ski manufacturing would fall by 50 pairs per thirty days (recall that the chance value per snowboard at Plant 3 is half a pair of skis). That may carry ski manufacturing to 300 pairs, at level B. If Alpine Sports activities have been to provide nonetheless extra snowboards in a single month, it will shift manufacturing to Plant 2, the power with the next-lowest alternative value. Producing 100 snowboards at Plant 2 would depart Alpine Sports activities producing 200 snowboards and 200 pairs of skis per thirty days, at level C. If the agency have been to change totally to snowboard manufacturing, Plant 1 could be the final to change as a result of the price of every snowboard there’s 2 pairs of skis. With all three crops producing solely snowboards, the agency is at level D on the mixed manufacturing prospects curve, producing 300 snowboards per thirty days and no skis.

Discover that this manufacturing prospects curve, which is made up of linear segments from every meeting plant, has a bowed-out form; absolutely the worth of its slope will increase as Alpine Sports activities produces an increasing number of snowboards. It is a results of transferring assets from the manufacturing of 1 good to a different in accordance with comparative benefit. We will study the importance of the bowed-out form of the curve within the subsequent part.

Paul Krugman

Nobel Prize-winning economist Paul Krugman teaches you the financial theories that drive historical past, coverage, and assist clarify the world round you.

Explore the Class