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Christopher Makler
Stanford University Department of Economics
Econ 50: Lecture 5
From production functions to the PPF
Getting situated in "Good 1 - Good 2 space"
Resource constraints and the PPF
Deriving the equation of the short-run PPF
The Marginal Rate of Transformation (MRT)
Shifts in technology and the long-run PPF
Two "Goods" (e.g. fish and coconuts)
A bundle is some quantity of each good
Can plot this in a graph with x1 on the horizontal axis and x2 on the vertical axis
What tradeoff is represented by moving
from bundle A to bundle B?
ANY SLOPE IN
GOOD 1 - GOOD 2 SPACE
IS MEASURED IN
UNITS OF GOOD 2
PER UNIT OF GOOD 1
ANY SLOPE IN
GOOD 1 - GOOD 2 SPACE
IS MEASURED IN
UNITS OF GOOD 2
PER UNIT OF GOOD 1
TW: HORRIBLE STROBE EFFECT!
Labor
Fish
🐟
Coconuts
🥥
[GOOD 1]
⏳
[GOOD 2]
PPF
PPF
Note: we will generally treat this as a positive number
(the magnitude of the slope)
In this simple linear case, we can just solve:
It takes 31 of an hour (20 minutes)
to make another
unit of good 1
It takes 21 of an hour (30 minutes)
to make another
unit of good 2
If you spend 20 more minutes to make another unit of good 1, how much good 2 could you have made in that same 20 minutes?
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Suppose Chuck can use labor
to produce fish (good 1)
or coconuts (good 2).
If we plot his PPF in good 1 - good 2 space, what are the units of Chuck's MRT?
Suppose Chuck could initially produce 3 fish (good 1) or 2 coconuts (good 2)
in an hour.
He gets better at fishing, which allows him to produce 4 fish per hour.
What effect will this have on his MRT?
CHECK YOUR UNDERSTANDING
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Consider an economy with L=100 units of labor and K=100 units of capital.
In the short run, K1=64 and K2=36.
In the long run, capital can be reallocated in any combination between goods 1 and 2.
Max in SR
Max in LR
The New York Times, Oct. 29, 2013
Insider, July 23, 2020
Consider an economy with L=100 units of labor and K=100 units of capital.
In the short run, K1=64 and K2=36.
In the long run, capital can be reallocated in any combination between goods 1 and 2.
Max in SR
Max in LR