Hi folks, it's Chace again, Dr. Stiehl if
you're feeling formal, we're gonna go ahead
and take a crack at chapter two and
rather than try to go through the entire
chapter I'm going to highlight the two
major models that we're going to pay
attention to and in this first portion
of the lecture we're going to deal with
the PPF.  The PPF is one of the simplest
models that you're going to find and
it's got some very very limiting
assumptions.  It's going to assume that
there are only two goods, the time high
time horizon is limited, resources are
fixed in quality and quantity, and the
technology is fixed... and you might be
asking yourself those seem pretty
restrictive why would you ever do that?
Well what we're essentially trying to capture
is a snapshot of an economy.  We're
going to try to limit it down to its
most bare essentials so that we can
highlight some real basic relationships
between scarcity and trade-offs and even
talk a little bit about growth... so let's
go ahead and just get started.   I think
one of the easiest ways is to just take
a look at the model, so let's assume two
goods. The classic example is guns and
butter and these could be any two goods.
Later on we'll relax the assumption a
little bit and talk about two different
types of goods, so let's start out with
particulars at first,  guns and butter, and
we're going to draw in this bowed out
curve this bowed out curve is actually
our frontier,  and the frontier is showing
us that there are limitations to what we
can produce within the economy.  If we're
making sure that all of our resources
are actively employed, then we're going
to be out here on the curve... and we have
choices about how many guns we want  and how
much butter we want, but if we're
actually using all of our resources, 
not letting any of them sit around idle,
you can't have more of both.   What we're
going to find out is that if in fact you
sit here at Point a
and you would like to get more butter...
you could get down here to point B which
clearly has more butter,  but in order to
get down here to point B you are going
to have to give up some guns.
So the most basic concept the PPF captures
for us is that one scarcity exists,  and
you might ask yourself well how does it
capture that?... the point of there being
a line captures it, because it's
implying that you can't have unlimited
guns and butter.  You have this constraint
that your dealing with,  and scarcity also is
going to force this into trade-offs,  i.e.
if you want more butter you're going to
end up giving away, or foregoing, some
guns.  That trade-off there.. in order to
get this butter.. we ended up losing some
gun.  This is in fact what economists refer to
as an opportunity cost.  When we choose
more butter we end up giving up guns
which would have been our next best
alternative.  It's going to be important
for us later on, so I want you to keep
that concept in mind..it'll figure
prominently when we talk about
comparative advantage.   So we've got a
couple of things going for us.. we've got
scarcity we've been able to model that.
We've also been able to highlight the
fact that scarcity forces us into
trade-offs,  and the last thing I want to
do for the basics of this model is talk
about why we refer to it as a frontier. 
Now I don't know about you,  but when I
think about the frontier I think about
the edges of civilization or the edges
of what is possible, and that's exactly
what this model is trying to capture.
Essentially being out on the frontier
implies that you're doing everything
that you possibly could. 
So points out here we are going to refer
to as unattainable and points inside
we're going to refer to as inefficient.
Inefficient in the sense that we have
some resources that we're obviously not
using well, so you got three basic
regions.  Inside you have inefficient use
of resources... anywhere on the line you
have no idle resources and we're going
to refer to that as efficient...and then
anywhere outside we're going to talk
about is currently unattainable. OK, so
we've got the basics of the model more
or less taken care of.  Let's talk about
some ways in which we can expand what we
can do in this model,  so previously we've
been drawing guns and butter.  Another way
that we can sort of broaden out the
usefulness of this model is to talk
about two different types of goods.  We
can talk about capital goods which I'm
going to label with a K and consumption
goods which I'm going to label with the
C.  Capital goods you can think of as
goods that are manufactured and are
going to help us produce other goods
later.  Consumption goods you can think
about is things like shirts, cereal ,
video games,  things that we're going to
consume up in this period but aren't
going to be of any particular use for
producing more goods in the future.  Now
one of the things that we can start to
talk about, once we broaden this out, is
we can start to discuss what does it
mean if the society changes from one
bundle of goods to another. In other
words what if we were to go from A to B. 
Now the model doesn't necessarily pass
any judgments on which bundle is correct, 
in that sense you could say that it's a
reflection of positive analysis.
But if you started to ask about what are
the differences between A and B I hope
that you could tell me that it's pretty
obvious here that B has a higher amount
of capital than A does,  and if capital is
going to be useful for making other
goods, then fundamentally moving from A
to B seems like it should impact what
you're capable of.
In other words it should be able to
change the frontier itself, and in fact
that's what we'd expect to see. If you
have more capital goods than we are now
more capable and our frontier, our
possibilities of what we can produce, is
definitely going to go out... and we're
going to see that by moving this curve
out.  What we've done here is actually
modeled another basic element
of economics.   Not only can we show
scarcity and trade-offs we can also show
economic growth, and this economic growth
is evidenced by the PPF moving out in
space.
In similar fashion we can also talk
about things that would change our
overall possibilities.  In order to do
that we need to loosen up some of our
other assumptions.
Once again capital and consumption goods...
it's entirely possible that we end up
finding more oil... we could find more
deposits of precious metals... or even
normal metals like tin... you might have
more people that are born and enter the
labor force.... all of these things would
change our abilities to produce.  And you
could show all of these as shift out in
the PPF.  Now sometimes you'll find things
like iron ore deposits, and iron ore
deposits might be a little bit better at
helping us produce capital goods than
they are consumption goods.  So it's okay
if we move the PPF out in a way that
privileges capital goods over
consumption goods or reflects the fact
that we are now more able in that area
than in others.  It's also possible that
we can measure, or not measure, we can
reflect technological changes if we find
a better way of doing things.. like when
they figured out how to make steel with
the Bessemer process in the late 1800s
that was going to be something that was
hugely useful for capital goods and also
probably for some consumption goods, but
they essentially can start making steel
at rates that they've never been able to
before, so you could think about this
movement out of the PPF being caused by
resources.. where we were discovering iron
ore over here... or over here by figuring
out a better way of using that iron ore
to turn it into steel with the Bessemer
process a technological improvement.
Either one of these are actually going
to be able to move the PPF out.  Now it's
entirely possible that the PPF could
move in..
you could lose resources.. you could have
a plague that killed off you know tons
of people... anything that destroys your
possibilities permanently would of
course move the PPF in. Now what I don't
want you to make the mistake
of doing is moving the PPF in if you
have something like a general strike. So
when the Grecian citizens recently we're
angry at their government and they decided
that they were going to go on strike and
not work you might be tempted to move
the PPF in.   Don't do that you just need
to make a movement inside of the curve
inside of the frontier, because what
you're actually showing with a point
inside here is that we are not
effectively using all of our resources
at the moment.  But it's not like we've
forgotten how to work.. society for
whatever reason has chosen not to do that. 
Here are some of your basic shifts that
you can see within the PPF, and of course
both of these would also be considered
ways in which you could grow the economy.
OK, one last thing with the PPF let's
go ahead and use the PPF to model some
policy changes.  
There we go, policy changes.  If you ever pay
attention during presidential elections
there pretty consistently telling you
how they're going to get the economy to
grow.  Usually they talk about this is as a
jobs plan or some sort of thing like
that.  You can model some of these basic
ones like the Republican plan.
Republicans for quite some time have
always suggested that they can get the
economy to go by lowering taxes.  So why
would they possibly think that this is
going to get the economy to grow? The
idea of course is that they're going to
lower taxes on rich folks, and when rich
folks have more money they're not just
going to sit on it they're going to look
to do something useful with it is the
idea,  and the hope is that they invest in
capital...so what the Republican plan is
largely driving at is trying to force,
through taxation, a change in the way
that we're using our resources.  Putting a
little bit more money into capital
investment and of course that's where
they're thinking that they're going to
get that growth from,  so you have a
Republican plan there.  Another way that
you could look at this is, or another
example of this is, is you could look at
perhaps Clinton,  and I mean Bill not Hillary.   Bill Clinton fancied himself
somewhat of an education president, and
he thought that you know investment in
education was really an important thing
for driving the economy..and if we were
to try to talk about that in the context
of the PPF we'd have to understand it as
him trying to improve the resources the
the economy has to work with.  If we have
much more highly trained folks more
skilled folks, then it stands to reason
that they should be able to produce more
than unskilled and untrained workers.. so
you get sort of a democratic education
platform, or they might refer to it as a
human capital platform,  improving the
resources that we have to work.
So as you can see our little PPF
actually does quite a few things for
us.   You can show scarcity, the fact that
we're forced into trade offs when
scarcity is present, you can model growth
with it, and we can also a model basic
policy changes or policy proposals.  Our
next topic we're going to deal with is
comparative advantage and what we're
going to find with comparative
advantage is that it's possible to
escape the PPF... if you're willing to
engage in trade with other nations.. So
we'll look at that in our next
installment.
