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Production Possibilities Curve as a model of a country's economy

In this video, Sal explains how the production possibilities curve model can be used to illustrate changes in a country's actual and potential level of output. Concepts covered include efficiency, inefficiency, economic growth and contraction, and recession. When an economy is in a recession, it is operating inside the PPC. When it is at full employment, it operates on the PPC. 

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  • male robot johnny style avatar for user Macman
    ahh yes but, what if Utenselandia just made sporks? then they could put double the effort into one utensil, that serves for a spoon and a fork.
    (29 votes)
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  • blobby green style avatar for user Will Lawson
    With more rabbits would require more forks and with more berries would require more spoons. These nations could trade easily.
    (14 votes)
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  • male robot hal style avatar for user andy shi
    How do you represent 3 things other than 2
    (3 votes)
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    • starky tree style avatar for user melanie
      You would need a three-dimensional graph! That's exceedingly difficult to represent in 2 dimensions, so usually we restrict our analysis with this model with two goods. A common "trick" is to lump goods together by characteristics, like having consumption goods on one axis and capital goods on the other.
      (19 votes)
  • starky sapling style avatar for user ForgottenUser
    Why is the PPC continuous if only discrete values could be meaningful? Shouldn't it be more of a staircase shape? For example, you wouldn't produce 4.5 forks and .5 spoons.
    (7 votes)
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  • male robot hal style avatar for user Mudit Sharma
    Why doesn't Sal mention humans as a resource? If there would be no one to figure out the use of the other resources, there would no growth.
    (0 votes)
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  • leaf red style avatar for user Victor
    In regards back in Where Platelandia attacks I wanted to ask about Innovation and to help understand I am going to use a few "what if..." scenarios. If a worker finds a way to make spoons and forks faster by creating sporks then that concludes a new technology, but also this allows workers to make more with less seemingly reducing labor. But because of this new factories have been made or re-compensated to fit these new requirements making a change in Capital. What I am getting at is where does innovation stand? Is it its own factor/"Scarcity" that makes growth because of the effects it has? Does it fall under specifically Technology, Labor, Capital, or Land or can it be all of them? For a scenario to help, if Platelandia attacks and because of this growing war a new way of armament is formed the Spork. Even with the destroyed factories, less laborers, etcetera there is still an increase of production. Would this be a cause of the Decreasing O.C. (Opportunity Cost) curve because of the situation 'if what use to be the forks and/or spoons at the vertical line going down and the other line horizontal representing sporks slowly increasing?
    (3 votes)
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  • leafers ultimate style avatar for user anvithjasti
    if contraction takes place that means that the PPC moves inwards or towards the origin and a new PPC is drawn. then if any point lies on the new PPC then is it at maximum efficiency?(even though all the factors of production reduced they will be working at their maximum capacity)

    hope you could understand my question
    (2 votes)
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    • male robot donald style avatar for user Jeremy S
      Yes, even if the PPC shifts inward due to decreased investment, lower economic growth, decreased productivity/technology or other factors, any point on the PPC still represents max efficiency production. While the economy's productive capacities have decreased, resources still may be used to their maximum potential at a decreased rate, if that makes sense. So the same concepts still apply where any point on the curve is maximum efficiency.
      (4 votes)
  • leaf blue style avatar for user Adam
    Couldn't an output outside of the PPC indicate incorrect calculation of the PPC as well?
    (2 votes)
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  • blobby green style avatar for user Marcello Mazzilli
    Why in this course a default PPC curve is always an actual curve (outbound) and not a straight line. I mean... just for the sake of learning... just by imagining an ideal situation... shouldn't a straight line better represent the proportional cost where 2 elements are involved? Of course in real life we have situations where "the next" rabbit is cheaper to find(because we learned where they live) or is harder to find (because they become smarter).. but again... shouldn't a straight line be better a a default graph when teaching PPC ?
    (2 votes)
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  • cacteye yellow style avatar for user John Hermann
    Would I be wrong to think that the most optimal combination of forks and spoons being made in this scenario would be in the middle, making an equal amount of both spoons and forks?
    (1 vote)
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    • purple pi teal style avatar for user AV25
      Not necessarily. It depends on what the demand is for forks and spoons. If there was equal demand for forks and spoons, then yes, it would be the most optimal. If, however, the demand for forks was higher than the demand for spoons, the optimal combination would be different.
      (4 votes)

Video transcript

- [Instructor] Let's say that we have some country, let's call it Utenslandia, that can only produce one of two goods or some combination of them. So it can produces forks, or it could produce spoons. And so this axis is the quantity forks, this axis is the quantity of spoons and let's say that if it puts all of its energy into forks, well it would produce that many forks and no spoons, and but then if tried to focus some of its energy, some of its resources on spoons, well then it would produce fewer forks and then the more spoons it produces, it will produce fewer and fewer forks all the way to the point that if it only focused on spoons, well it could produce that many but then it would produce no forks. What this curve is, and we touched on it on other videos, this is the production possibilities curve for our country of Utenslandia that makes utensils and obviously, most countries are much more complex, they don't only produce some combination of two things but this helps us, this is a nice model for understanding what countries might be capable of. Now one way to understand this production possibilities curve is it shows what can be efficiently produced by this country. If it efficiently utilized all of its resources, then it will produce some combination of forks and spoons that sit on the production possibilities curve. So this point right over here, this combination of spoons which would be that many spoons and that many forks, this combination over here, this would be efficient. That point x would be an efficient production for Utenslandia. So at this point right over here, let's call that point y. Now what happens if Utenslandia goes into some type of recession. For whatever reason, it's not able to use its resources as efficiently, and we're talking about resources, we're talking about land, we're talking about maybe its factories, we're talking about the materials it has, maybe its labor, well on that situation, let's say it was operating efficiently here but then the recession happens and so it then it operates right over here, let's call this point right over here z, this would be an inefficient use of its resources, sitting behind the production possibilities curve. So this is inefficient, just like that. And so one question you might have is well what about points that are beyond the production possibilities curve like point, let's just call that point a right over there. What about that point? Well, unless you have more inputs, unless you have more land, more capital, more labor, if you don't change the resources here, this is actually going to be an unattainable point for Utenslandia. But let's say you really wanna reach it, how can that happen? Well, you can actually have investment or you could have more land or more labor. So let's think about that scenario. So let me draw the two axes. So that's my fork axis, that's the quantity of forks that Utenslandia will produce in the year. This will be the spoon axis, right over there. And let's draw our original production possibilities curve. So I'll try to make it look pretty similar to what we had before. So that's our original production possibilities curve. Another way of thinking about it is it's showing the trade off between producing forks and spoons. You can actually think about what is the opportunity cost of producing an incremental spoon in terms of forks. How many forks do you have to trade off because remember, there's scarcity at play. You don't have an infinite amount of metal to produce things with, an infinite amount of labor, an infinite amount of factories. But let's say Utenslandia, they are able to get some more land on which to build factories, maybe they build some more factories so capital goes up, maybe some people migrate to Utenslandia. So in that situation, you would have growth and your production possibilities curve would actually shift outward. So here, we are showing, let me make it a little bit, we are showing a situation right over here, this is still a production possibilities curve but we're showing what happens when you have growth. And once again, what are the drivers of growth? Well this could be the amount of land that you have goes up. The amount of capital that you have goes up. Capital could be things like factories, it could be machinery, you could have people, more people are able to help produce the spoons or forks. You could just have better technology for producing spoons and forks. Sometimes people will even talk about entrepreneurial spirit, that people are able to figure out better ways of combining these resources so that you could produce more spoons or forks. But let's imagine now the other scenario. Let's imagine a scenario where Utenslandia gets into a war with Platelandia. And Platelandia sends their bombers in and starts destroying some of the factories of Utenslandia and so what will happen in that situation? So before the war, this is that production possibilities curve for Utenslandia. But now, because of the war, maybe Platelandia is able to take some land from Utenslandia, maybe it's able to destroy some of the factories and other forms of capital, maybe people flee Utenslandia so there's less labor. And maybe for whatever reason, they can support less technology or they forget how to use some of their technology 'cause the war is so long and protracted. Well in that situation, your PPC, you would see contraction. And contraction, I could depict it, let me shift my PPC, my production possibilities curve inward just like this. So this is a situation where we are seeing contraction. So big picture here, your production possibilities curve is exactly what it says it is. It shows what can a, what is the potential combination of, in this case, goods that this nation can produce and if you're sitting on the curve, it shows that that nation, that country is efficiently using its resources. If you're sitting within the curve, it's inefficiently using its resources. And if you're on the right of the curve or beyond the curve, well that's a situation where if you don't change the inputs, all else equal, this would actually be unattainable. The way that you actually do attain, get to points beyond the curve, is by shifting the curve itself. By having more land, more capital, more labor or more technology which we see in this middle scenario.