Learn the toughest concepts covered in your Macroeconomics class with step-by-step video tutorials and practice problems.

Introductory Economic Models

1

Understanding the PPF

6m

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in this video. I'm going to introduce you to an economic model called the production possibilities frontier. So here we have a graph with the production possibilities frontier on it. We're gonna call it the PPF, for short, some books call it the PPC. Um But I'm gonna use pdf throughout these videos. So the PPF, it's a graph showing the combinations of output and an economy can produce with the available resources. Right? So this is what kind of mix of products can we produce with what we have? All right. So, we're gonna make some assumptions when we deal with this graph, um we've got to goods is what's gonna be the production of our society when we do a PPF. So in this example, we've got the economy of clutch Topia here, uh creating both thin crust pizzas and robots. Right? That is what we produce in clutch Topia, thin crust pizza and robots. We're gonna assume we've got a fixed amount of resources. Right? So this involves scarcity, right? We don't have unlimited resources. We have a fixed amount. And for our example, it's not gonna grow or shrink. We've got a certain amount of resources, a certain amount of labor, a certain amount of land, human capital, Right? Um So it's a certain amount of the inputs into the process. Um And our last assumption is that we've got fixed technology as well. Okay, So nothing's gonna be changing in this society. That's the idea. All right. So let's go to the graph we've got clutch Topia producing thin crust pizzas and robots. So along this line is what we call the PPF. So this blue line on the graph that is clutched? Oh pIA's P. P. F. Okay. So that is the production possibilities frontier. And when we look at this graph, we're gonna look at a couple of key points here. So we look at the point way up here on the graph where we're producing uh 10,000 robots up there, right? Where you have 10,000 robots, but no pizza. So in clutch Topia, if we put all our efforts to robot production, we could have 10,000 robots. Now, let's say clutch Topia. Put all their efforts to pizza production for thin crust pizzas. We could pop out four four million pizzas, Right? But zero robots, if we were at this point uh down here on the graph, but we can also produce some mix of the two. Right? We can have some robots and some pizza. But we know that if we have four million pizzas, we're not gonna be able to have any robots. Right? So four million is the maximum amount of pizzas with no robots. But let's say we're at a point like right here, right, We can have a mix of Say three million pizzas and 4 4000 robots there. Right? So anywhere along that line is still part of the mix we can attain. Right? So we've got two things to think about. We've got attain ability, right? Is it attainable or unattainable? This level of production. So what we're gonna say is that anywhere inside and on the graph or excuse me, on the PPF. So on the line as well inside and on the line is attainable, it's a mix of production that we can attain. Right? Um So what I'm saying here is yes, we could be at this line on the line here at um three million pizzas and 4000 robots. But it's totally possible that we could be say at this point right here in blue where we're producing one million pizzas and 2000 robots, right? That is still an attainable amount of production compare that to an unattainable amount. So I'm gonna write attainable here, inside of yellow attainable and for unattainable I'm gonna use this light blue. So anything out here outside the graph, right. Anything outside the graph is going to be unattainable. It's an amount of production that we cannot achieve with our current resources, our current technology. Right? So let me show you an example here, if I were to put a point out here, say at this point in blue um now we're saying we want three million pizzas and eight million excuse me, 7000 robots. And that's just unattainable because it's outside of the curve. So outside of the curve of the PPF we are gonna call unattainable. Okay, so inside is attainable, outside is unattainable. And one more thing I want to talk to about real quick is productive efficiency and allocated efficiency. So we call something productively efficient. If you scroll down a little bit we've got here, productive efficiency is producing at any point on the PPF. So any points on the PPF is productively efficient. That means we are getting the most we can with our current situation. Right? So we're saying we're efficient if we're anywhere along the curve. So this point right here, if we go back to the curve, I'm gonna start putting some points in black. All these points are productively efficient anywhere here along the graph. Right? That's all productively efficient on the graph. Okay, um, an allocated efficiency, if you see right there below productive efficiency. That's just a little more subjective. This is that you're producing the correct mix based on consumer preferences. So that's the idea of do the consumers of clutch topia, do they want three million pizzas or do they want one million pizzas? It all depends on the consumer choices and that's the allocated efficiency that you see. But on the graph, it's easy to tell if you're being productively efficient, productive efficiency is reached by being on the graph. Cool. So let's continue and we'll do a practice

2

PPF - Attainable and Efficient

4m

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Alright so let's go ahead and do this example. Um That uses the graph on the top of this page, assume clutch Topia features the PPF curve illustrated above Mark the following levels of production as attainable or unattainable. If production is attainable, mark the level of production as efficient or inefficient. Okay so we've got different levels of production here and let's go ahead and just start with the first one here, we're saying that clutch Topia should produce five million pizzas and 3000 robots. Okay um five million pizzas and 3000 robots. Let's go up to our graph. Let's find that point on the graph. So we're gonna go to five million pizzas here and 3000 robots. And if we find that point that puts us right here right? And this is outside of the outside of the graph, right? Um outside of the PPF. So this point is unattainable, right? Based on our previous discussion, if it's outside of the PPF, it is unattainable. So our discussion about efficiency doesn't matter because it's unattainable. So there's no way it could be inefficient or ineffective, efficient or inefficient because we can't even obtain it. So we're just gonna put em a here. Okay let's try the next 11 million pizzas and 9000 robots. So back on our graph let's find that 90000.1 million pizzas and 9000 robots. So here's one million pizzas. If we go up from one million and we go to nine on the robots and we're gonna find that point and that point lies right on the PPF right there at 9000 robots and one million pizzas. We know that if it's on or inside the PPF, it is attainable. And then if it's on the PPF, we know that it's productively efficient. So in this case we have both an attainable and efficient amount because we're on the PPF so we have attainable and efficient. We are getting the most that we can with our resources at that production mix. So it's productively efficient. Let's try the next 14 million pizzas and zero robots. So let's go to our graph and let's find that point. So we've got four million pizzas and zero robots at this point already on here in green. Let me highlight it in red here. So four million pizzas and zero robots were right here down on the X axis. Um So what do you think is this point attainable or unattainable? Well, it looks kind of weird because it's on the access. We're not producing any robots, but we are still on the PPF. So we've got four million robots. And excuse me, four million pizzas and zero robots. That is an attainable amount and it's efficient because it is on the PPF. So we've got an attainable efficient amount here. Let's try the next 13 million pizzas and 3000 robots. So now we've got three million pizzas and 3000 robots, we are going to go up from three million pizzas over from 3000 robots and end up at this red point right here notice we're not on the PPF, we're just inside of it, We didn't reach that perfect production uh efficiency, we are just inside so yes, we can attain this level of production but it's not efficient because we could be producing a little bit more robots are a little bit more pizza with our current resources and technology. So we have an attainable amount but it is inefficient. So we're gonna put an eye there for inefficient. Alright, let's try the last 12 million pizzas and 7000 robots. So here we go. Two million pizzas right here and let's find 7007 will be right up here. So this red dot that I'm adding now is going to be uh two million and 7000 notice that lies right on our PPF. So again we've reached productive efficiency. Um oh had a weird scroll there, Give me one second to get back to where we were and oh boy, there we go. We've got an attainable, efficient amount. Alright, so that last one is attainable and efficient. Cool guys, hope you got that. Let's move on to the next video

3

Problem

A point inside the production possibilities frontier is

A

Attainable, but inefficient

B

Efficient, but unattainable

C

Efficient and attainable

D

Inefficient and unattainable

4

Problem

The economy of Clutchtopia can be summarized as seen on the PPF below. Consider the production mixes denoted alongside the graph. Mark the levels of production as Attainable (A) or Unattainable (U). If production is attainable, mark the level of production as Efficient (E) or Inefficient (I).

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