The Production Possibilities Frontier: Important Terms and Considerations

Here are the chalkboard notes.

This module introduces the notion of the market. We begin with a discussion of scarcity. To accomplish this, our primary objective this week will be to discuss the production possibilities frontier model. We will show how if an economy lies on the PPF then it makes choices that reflect the allocation of scarce resources to competing ends; hence, we live in a world of scarcity. Important terms for this chapter (6):

Scarcity: limitations on the resources used in production in the face of unlimited human wants.

Efficiency: This refers to the notion of the best allocation of scarce resources in the economy. Pareto optimality. Efficiency in exchange.

Opportunity Cost: the cost of the resources that is devoted to the production of one category of goods or services and therefore cannot be used in another activity. What do we give up by using a particular basket of resources?

Production Possibilities Curve: a model that relates the efficient allocation of resources to two different produced goods. Assumes:

• Full employment 
• Fixed factor supplies at a point in time 
• Constant technology. 

Ceteris Paribus: All else held equal.

Economic Growth and the PPF: When the economy grows due to investment, changes in productivity, etc., the PPF shifts outward. See pg. 97 of the text for more on this.Remember: this is a process that deals with the long term, and which relies upon the process of capital accumulation. Keep this idea in the back of your mind as we go forward in the course, as it will become central to our analysis.

Here is a question for you? What happens if we do not lie on the PPF? That is, what if the assumption of full employment does not hold? As you think critically about this question, I want you to bring the concepts of opportunity cost and scarcity into the picture. The slideshow below should help you grapple with these issues.

The PPF at Less Than Full Employment from Mitch Green

Understanding Scarcity through the Production Possibilities Frontier Model

This video lays out the issues we encounter in chapter 6 of RSSS: Scarcity: "You Can't Always Get What you Want."  When you watch this video keep these questions in mind: What does it mean if we lie inside of the curve? What implications does this have on the concept of opportunity cost and scarcity?



The next video explains the concept of opportunity cost. Watch this if you are having difficulty grasping the importance of this term in the context of the PPF model.

Adam Smith, the Division of Labor, and the Machine Problem

Here are the chalkboard notes (from last semester).

Recall,  that out of the enclosure movement comes the institution of private property, which leads to production for exchange, which eventually leads to development of a labor market. Adam Smith was analyzing a handicraft, petty commodity production system, which he saw as a "natural" system of perfect liberty:

• Natural rights doctrine – against divine rights 
• Against monopolies - such as those established by the crown, like the East India Co.
• Envisioned a highly competitive system of production and exchange that would make it so that no one individual could amass much economic power. 

Through their mutual self-interest society as a whole would benefit. Division of Labor - > productivity -> increase in the wealth of nations.

1. Increased dexterity 
2. Time saved by not moving between stations 
3. Specialization would lead to innovation in technology to increase productivity. 

Can you think of examples of division of labor in production? The assembly line is a classic, but modern example (the assembly line did not exist in Smith's pin factory example). This video shows the production process of the old Model T Ford. Take note of how many workers there are relative to the machines.
This one documents the much later Dodge production process (with audio!). Are there any differences between the ratio of workers to machines between this one and the first video?
Contradictions in Smith: This passage from the Wealth of Nations captures some misgivings Smith had about the division of labor and its effect on the welfare of the individual

In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible to become for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging,...... 

This is why Smith advocated for free public education. This is something to think about when you read about schemes to privatize public education in America.

Marx: Whereas Smith was writing on the dawn of capitalism (really he was looking back to the end of the age of handicraft production; thought mercantilism was antithetical to this ideal – Jeffersonian ideal), Marx lived during the rise of the industrial revolution and witnessed the excesses of laissez faire. Saw the system as both alienating and exploitative. In a system in which workers must work for wages in order to purchase the goods and services necessary to stay alive, he thought the capital accumulation process was a major source of unemployment, poverty and what he called the immiseration of the proletariat.

How can capital accumulation which raises productivity and leads to an increase in the wealth of a nation be bad for the worker? With fewer workers necessary to carry out production, labor becomes "redundant." Is this true today? Well, take a look at this last video of automobile production and compare this to the previous two? What is the obvious trend here?

Lecture notes for 1/24/2013

Here are the highlights from today's class:

• We went over again our two working definitions of economics. You should refer to this post for these definitions.
• I think most of you grasped the importance of the distinction between these two definition. If you are curious, here are links to more info on Allan Gruchy and Lionel Robbins. 
• We also spent time dealing with Robert Hielbroner's introduction through Chapter 2 of his, Economics Explained:
• we learned that markets and market society have not always existed
• there are some preconditions to markets society:
• private property
• the "commodification" of things that precapitalist societies would NEVER have thought of as commodities, e.g. land, labor and capital
• the emergence of capitalism was truly revolutionary; albeit a slow one.
• capitalism let the technology genie out of the bottle.  Even Karl Marx and Friedrich Engels, two of the most vehement anti-capitalists to ever grace the world with their presence, recognized that capitalism brought forth a set of forces that promoted the rapid development of new technologies that transform our production landscapes.

And this last one is set apart from the outline above because of its singular importance to this course:  prior to capitalism economic life was relatively stable. Why is this?

The central objective of this course will be to develop an answer to this question in terms of the notion of a monetary production economy. 

Capitalism, as a monetary system of production, is always and everywhere dedicated towards accumulating more and more money. Money is the engine of this system. The end of production is never consumption, although it would seem fitting to think so and is often the convenient side effect. Rather, the end of production in this system is to realize monetary gains. We also call this pecuniary gains. If the business person believes that production will not yield the monetary gains he or she needs or desires, he or she is not obliged to engage in production. It's that simple. But, since the goods and services that constitute the basis of our material well-being are a by-product of this production process under capitalism, this means that there is no guarantee that they will be forthcoming. In a monetary production economy there is always the alternative of hoarding money in liquid form, or purchasing financial assets that yield a rate of return in lieu of actually producing something. That's the source of economic instability and it can emerge naturally from within the system. 

Think about that for awhile. This will be a recurring them throughout the course. Other themes some directly and indirectly related to this include:

• recessions
• business cycles
• interest rates
• full employment
• economic growth
• price stability
• money
• fiscal policy
• monetary policy
• financial panics / crises
• inequality

Whose Feudalism?

This sketch from Monty Python is supposed to be set in feudal England. Apparently these serfs are unaware of the feudal obligation. Enjoy.

Two Definitions of Economics

Economics is (according to these two economists):

1. Lionel Robbins: the study of the allocation of scarce resources among competing ends
2. Allan Gruchy: the science of the social provisioning process.

I argued that how you view economic issues will depend upon which of these definitions you have in mind when you think about the economy. The allocative definition lends itself to problems chiefly associated with exchange. That is, concepts related to purchase and sale, and more generally, the problem of what to do when you have to make a choice between one of two options. You can't have your cake and eat it to! This definition is associated with (orthodox) neoclassical economics.  Hint: Soon we'll introduce the production possibilities frontier, which will allow us to see where this definition comes into its own.

What is Economics?

I defined economics at the end of class on Tuesday as the science of the social provisioning process.We will devote much of the next few weeks to exploring this issue in more detail. The important thing to keep in mind as we go forward in the class is that economic systems, regardless of whether we are dealing with capitalism, feudalism, something based upon slavery, or egalitarian tribal societies, each have these features in common:

1. a system for producing all of the goods and services that we need to carry out our lives.
2. a system for distributing these produced goods
3. some set of institutions that allow the system to reproduce itself. 

For most of the course (once we get through some historical material) we will be concerned with the economic problem under capitalism. That is, what moves us to produce the goods and services in a monetary production economy?