- [Instructor] We are now going to study
the magical republic of Fitlandia,
and as we often do in economics,
we're going to assume that Fitlandia,
which of course does not
exist in the real world,
is a very simple country.
It helps us create a model for it.
Let's say that Fitlandia is
capable of producing two goods.
It can either produce dumbbells.
That's my best picture of a
dumbbell right over there,
or it can produce protein bars.
So this right over here,
that is a protein bar
or some combination of the two.
So we can draw Fitlandia's
production possibilities curve.
So let me write this, PPC,
production possibilities
curve for Fitlandia.
Sometimes this will be referred
to as a production possibility frontier,
and so let me draw two axes.
One for dumbbells and
one for protein bars.
So the vertical axis right over there,
and then the horizontal
axis right over here,
and we're going to assume
that everything we do,
this is in thousands of tons per year,
and so in the vertical axis,
we have one, two, three,
four, and five, and the horizontal axis,
one thousand tons per year,
two thousand tons per year,
three thousand tons per year,
four thousand tons per year,
and five thousand tons per year,
and let's put dumbbells
in the vertical axis.
Dumbbells right over here,
and let's put our protein
bars in the horizontal axis,
and let's say we know that,
we're maybe the economics
minister for Fitlandia,
or the secretary of commerce,
or something like that,
and we know that if we put all
of our energy into dumbbells
and optimally allocated our resources,
we could produce five, actually,
let's say we could produce
four thousand tons of dumbbells in a year.
We also know that well,
if we wanted to produce some protein bars,
we're going to have to
give up our production
of some dumbbells, and so the
more protein bars we produce,
we're going to produce
fewer and fewer dumbbells,
and so we're going to sit on this curve
if we're producing as
efficiently as possible
given the resources we have,
and if we put all of our
resources into protein bars,
we could produce three thousand tons
of protein bars per year.
So this right over here
is our production possibilities curve.
If my country is operating efficiently
and all the resources are being used.
When I talk about resources,
I'm talking about people's
time; so my labor.
I'm talking about the factories
are being fully utilized,
the land, the material.
Then I would sit someplace
on this production possibilities curve.
Sometimes it's referred to as
a productions possibility frontier
because you can't go beyond
this unless something changes.
We're gonna talk in a second
about why they change.
So if you sit on this curve,
if you sit someplace on this curve,
and the country might choose
to sit at different points
on this curve, this is efficient.
Efficient use of the resources,
and it's kind of a theoretical efficiency.
In practice, almost no country can,
or really no country can fully
utilize all of its resources
where all of it's people are working
absolutely all of the time,
and so in reality a
country might actually sit
a little bit below it's
production possibilities curve.
So someplace behind it.
Now what would happen, let's
say a country right over here,
and this is a real, let's just
take the theoretical country
that somehow is able to
operate super-efficiently,
and it's sitting on it's
productions possibility curve,
or it's production possibility frontier,
and let's say it were to enter
into some type of recession,
where all of a sudden
some of it's population
isn't able to work, so the labor pool
isn't being fully utilized,
what would happen to it's production?
Well, it's production would
then go off the curve,
and it would go to down and to the left,
and so it might end up right over here.
So here maybe we have some unemployment.
Unemployment right over here,
and so this is an
inefficient use of resources.
Maybe Fitlandia gets into a
war with some other country,
and that other country destroys some
of their productive capability;
some of the factories,
or maybe some of the people of Fitlandia
decide to move someplace else.
Well the what would happen?
Well then your production
possibilities frontier
would actually contract.
If you have fewer factories,
or if you have a smaller population,
or maybe you lose some
territory to another country,
then you have fewer resources
with which to produce,
and so you could end up in a scenario
where your production
possibilities frontier
contracts to something,
contracts to maybe something
like this, and so this movement
of the production possibilities curve,
this would happen if you
have contracting resources,
and likewise, most countries of course
don't want to be in this situation;
most countries want economic growth.
An economic growth is when
you have expanding resources.
So how can we get beyond this
production possibilities frontier;
maybe construct one that is further out?
Let's say we want to get a
production possibilities frontier
that looks something like this,
and it doesn't have to increase
both of the good proportionately.
Maybe we want to get to a
production possibilities frontier
that looks something like that?
How could we get there?
Well, there's a couple of mechanisms.
One is you could have more capital.
More capital.
What do we mean by capital?
Well, maybe we invest in
creating more factories
or getting more technology.
So computer-aided
things, robots, whatever,
so that we could produce more
either protein bars or dumbbells per year.
Another possibility is
we have more population.
More especially working population.
More population.
So the big takeaways here.
The production possibilities curve
or production possibilities
frontier for a country
are the combinations of
goods that it can produce
in a certain amount of time
if it's using all of it's
resources completely efficiently.
If it gets into some type of a recession
or doesn't used it's
resources efficiently,
then you're going to
have a production point;
some kind of combination
of producing goods
that sits under or behind
your production possibilities frontier;
maybe there, or there, or there,
and maybe as you come out of
a recession you might get,
again, closer to your production
possibilities frontier.
Now, there's also ways you
can shift the entire frontier.
The entire frontier, or the
production possibilities curve,
can contract is you have
contracting resources,
favorites that are bombed in
a war, net outward migration,
or your production possibilities
frontier can expand.
If you have more population,
more people who could be there
to work to produce goods,
more capital, more factories, more land,
more material with which to produce goods,
and so you can imagine most
countries want to do this,
and this notion of expanding
your production possibilities frontier,
this is what we refer
to as economic growth.
