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Unformatted text preview: LECTURE 4 PRODUCTION POSSIBILITY CURVES FOR THE UNITED STATES In Lecture 3, we created a production possibility curve for Sonnys cotton farm. The model demonstrated that, given fixed resources at a point in time, there are limits as to what we can produce, and we must somehow make a choice. We can extend the Sonnys cotton-corn model to examine the entire U.S. economy. Refer to Figure 4-1. Figure 4-1 represents a production possibility curve for the entire U.S. economy. 1 The assumptions are that, at this instant, producers in the United States are faced with limited resources. There are only a fixed number of acres of land available to producers in the U.S. at this point in time. The number is quite large, but it is still fixed. And trust me, for every privately owned acre of land out there in the big old U.S., someone holds a deed to it and is very protective of its use, especially if it is really scarce land that commands a high price. Likewise, at this time, there are fixed amounts of labor and capital available to producers. Of course, next year, next month, and even next week we could obtain more land, labor, and capital. The amounts couldnt increase much in a day or a week for labor and capital, and the total amount of land would take much longer to increase. That is why economists like to talk about year-to-year changes (and sometimes quarter- to-quarter) 2 changes in the macro-economy. In one sense, production possibility curves are limiting, in that we only have two axes that we can label with things like cotton and corn. But they arent that limiting, and are excellent for demonstrating important economic principles. 3 Figure 4-1 divides the economy into two types of economic goods, manufacturing output (which includes manufactured goods of all types and all 1 You will recall that in class we discussed the fact that we recently have been in a recession. In 2007, 2008, 2009, and 2010, Gross Domestic Product (GDP) is approximately $14 trillion. It was exactly $14 trillion in June of 2007 (read the numbers in the attached BEA tables closely), and reached a maximum of $14.5 trillion in the third quarter of 2008, after which the current recession set in hard and GDP dropped back to $14.0 trillion in the first half of 2009. As of the end of 2010 (the most recent data) GDP has increased to $14.87 trillion. 2 A quarter in economics refers to a quarter of a year: three months. Economists, financiers, and accountants are always talking about the third quarter results, or the fourth quarter results, and so on. 3 Note that we could put cotton on one axis, and all other things that we could produce on the other axis, and the model would work just as well for our purposes. Since we cant mix apples and oranges on an axis, when we start aggregating, as in all other goods, we have to talk about dollars worth of other goods , rather than bushels and bales. Again, this doesnt alter the results. non-agricultural services), and...
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This note was uploaded on 03/23/2011 for the course ECN 212 taught by Professor Nancy during the Spring '07 term at ASU.

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