Production Possibilities Chapter 1: PPF was drawn bowed out. The rate at which society could trade one good for the other depended on the amounts that were being produced. Here in Figure 1: the technology for producing meat & potatoes allows the farmer to switch between the two goods at a constant rate. Whenever the farmer spends 1hr less producing meat and 1hr more producing potatoes, he reduces his output of meat by 1oz and raises his output of potatoes by 4ozs [this is true regardless of how much he is already producing]. This leads to a straight line. If the farmer & rancher choose to be self-sufficient rather than trade w/each other, then each consumes exactly what he or she produces. The production possibilities frontier is also the consumption possibilities frontier. o PPF shows the trade-offs that the farmer and rancher face, but they will not tell us what the farmer & rancher will actually choose to do. “” The linear PPF is like “assembly line” production, where any worker on the line has essentially the same skills as any other worker, and substituting one worker for another is easily done with no loss of output.””
Specialization & trade Absolute Advantage Comparing the productivity of one person, firm, or nation to that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. Smaller quantity of inputs=absolute advantage Each Country’s Strength= Absolute Advantage [Prof’s Example: Rancher has an AA in both meat & potatoes so this is a Dual Absolute Advantage. Versus Shared Absolute Advantages. Our example has time as the only input. Determine absolute advantage by looking @ how much time each type of production takes. Rancher: has AA in both meat & potatoes. She requires less time than the farmer to produce a unit of either good. o Based on this info; rancher has the lower cost of producing; if we measure cost by quantity of inputs Opportunity cost Rather than comparing inputs required, we can compare the opportunity cost. OC is whatever must be given up to obtain some item. Rancher (acc to figure 1): 1oz of potatoes takes 10mins. Needs 20 mins to produce 1oz of meat. o So if rancher spends 10 minutes producing potatoes.. that takes away 10 minutes from producing meat. Meaning 10 mins of work produces ½ oz of meat. o Hence the opportunity cost of producing 1 oz of potatoes is ½ oz of meat. “”we see that the OC is constant along a linear PPF, as we produce more and more of one good. What we give up divided by what we get is constant. The slope of the line never changes. What we give up for what we get is always the same ratio””
Farmer: 1oz of potatoes takes 15 minutes. b/c he needs 60 mins to produce 1 oz of meat. 15 minutes of work would yield ¼ oz of meat.