101 Production Possibility Frontier

Define an economic good. Define resources. Define opportunity costs.

These are basic concepts and terms that an economics student needs to know. Learning about the Production Possibility Frontier or PPF is an awesome introduction to the study of economics because it introduces something called rationality.

What is a rational individual and how does he think? Okay, imagine that everything in the world is free. You can get anything you want without having to pay a single cent! Would you get a Ferrari? Heck, I’ll get myself 2! Or even 3! Am I being crazy? Am I being irrational? Why the hell would I need so many cars or houses?? Economically, I am not crazy and I am rational! I am maximizing my satisfaction or what we like to call utility!

Now imagine that you are given a billion dollars instead. Would you want to get your 2 or 3 luxury cars? You might, but you may want to use some of that money to buy a house or yacht or buy some investments. What are you doing? You are still maximizing your utility given a certain level of income!

Imagine that there is no such thing as money in the world and you need to use something else to exchange or better yet produce a car or a house or anything for that fact. How would you arrange these resources to do so?

Studying the PPF answers these questions. At the end of the video, you should be able to:

  • Define an Economic Good
  • Identify the 4 types of resources
  • Understand the concept of Opportunity Cost
  • Define Productive and Allocative Efficiency
  • Draw and Mark the PPF

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  1. Edwin says:

    Hi , I want to just clarify a few things about your video. I am just a year one student at SIM, struggling with intro to econs as well. I hope you can clarify my queries, it will be appreciated.
    4:43 you were actually saying what does opportunity cost affects. Before that you were defining opportunity cost, this led you to talk about what variables that opportunity cost affects which is trade. As you defined, opportunity cost is the best alternative forgone when you decide to undertake a specific action. Opportunity cost does not just affect trade, in fact opportunity costs is a condition that is prevalent under the condition of scarcity. Economics is the study of how we best allocate out limited scarce resources and that our actions will always curtail opportunity costs. It does not just affect international trade (and of course in Ricardian theory of trade and concepts of power purchasing parity) . The concepts of choice, scarcity and opportunity cost are central to any study to any economic issues. It extends to theories like the utility curve and the budget line and to macroeconomic issues like ensuring income equality and equity. Trade is just but a subset of issues discussed to show these concepts. An example I could give would be the prevalence of the budget line , this shows the concept of opportunity costs as well.
    7:42 you mentioned that opportunity cost is just merely giving up stuff for more stuff. The reason is you don’t have a choice due to the scares resources you have.
    8:06 You mentioned that the PPF is either curved or straight but no mention of the reasons or the underlying assumptions. There are several assumptions even you draw a line across the different combinations of goods (divisibility of fops ,goods and homogenous labour ) It is a straight line because the FOP(labor) is equally efficient when producing cabbages or bread in this case. One another important assumption is that there is NO law of diminishing marginal returns. That’s mainly the assumptions behind the linear PPF curve.
    12:56 It is mathematically wrong to just change the range of the equations just like that. When you write the equation 1x+ ¼ y ≤ 100, you are defining the entire boundary where your combinations can occur. (on the frontier and within the frontier bounded by the x and y axis) . When you change the equation to 1x+ ¼ y = 100, you are only interested about the points on your frontier, therefore you can continue to do your simultaneous equations and such to find the intersection of your labor and capital constraints.
    Hope that you could clarify these areas of doubt when I watch the video. Thanks .

    • Quickienomics says:

      Hi Edwin,

      I will get back to your questions this weekend. You’re from SIMES right?

    • Quickienomics says:

      Oh yea, you kinda answered your own questions right? lol. Maybe I’m not very sure on what your doubts are.

      It’s interesting how you brought richardian into chapter 1 though. You’re definitely gonna score some additional marks for that.

  2. Sk says:

    Hi. How do you define allocative effiiciency with regards to the graph?

  3. STEVE says:

    where scarcity,choice,and opportunity cost are allocated in the ppf

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