ECON 201 1st Edition Lecture 5 Outline of Last Lecture I. The Economist at Worka. Definition of a positive statementb. Definition of a normative statementII. Opportunity Costa. Definition of opportunity costIII. Production Possibilities Frontier (PPF)a. Definition of production possibilities frontier IV. Example PPF ModelOutline of Current Lecture I. Example PPF Model ContinuedII. Real Life PPF ApplicationsIII. The PPF: What We Know So FarIV. The PPF and Opportunity CostV. The PPF and Opportunity Cost ExampleVI. The Shape of the PPFVII. Efficiencya. Definition of productive efficiencyb. Definition of allocative efficiencyVIII. Economic Growth and the PPFCurrent LectureI. Example PPF Model ContinuedUsing the example PPF model from last time, we can determine if a certain production of goods is possible or efficient. Remember that one computer takes 100 hours to produce, while one tonof wheat takes 10 hours to make; we have 50,000 labor hours total. Below is the table and the graph from the previous lecture notes. Employment of Labor Hours Production (PPF) Computers Wheat Computers Wheat (in tons)A 50,000 0 500 0B 40,000 10,000 400 1,000C 25,000 25,000 250 2,500D 10,000 40,000 100 4,000These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.E 0 50,000 0 5,0000 100 200 300 400 500 6000100020003000400050006000Production Possibilites FrontierComputersWheat (in tons)Problem #1: Say this particular company wants to produce 100 computers and 3,000 tons of wheat. Is this possible and efficient? Problem #2: Say this particular company wants to produce 350 computers and 3,000 tons of wheat. Is this possible and efficient?0 100 200 300 400 500 6000100020003000400050006000Production Possibilities FrontierComputersWheat (in tons)Looking at the new chart above, we have graphed the same PPF but now included two points: the production of 100 computers and 3,000 tons of wheat represented by the red square, and the production of 350 computers and 3,000 tons of wheat represented by the green triangle. For problem #1, because the red square is inside the PPF trend line, it is possible; however,since it is not on the PPF trend line, it is inefficient. It is not producing all of the resources it could possibly make given the labor hours. In fact, it only uses 40,000 out of the 50,000 hours, as (100 hours)*(100 computers) + (3,000 tons of wheat)*(10 hours) = 40,000 hours.For problem #2, the green triangle is above the PPF trend line, which means that it is not possible. Regardless of how efficient this may be, this current production is impossible given thetechnology and resources available. II. Real Life PPF ApplicationsThe Michigan Central Station opened in 1913, but has not been used since 1988. The picture on the slide shows Detroit’s ruined train station, though it is evident that it was once a beautiful monument to the city. The reason for this ruin, along with many others in Detroit, is due to the crash of the automobile industry. In the early 20th century, the automobile industry did everything for Detroit’s economy. However, as Michigan’s car producers grew comfortable with their output and outside competitors began producing cars, the automobile industry collapsed from a lack of sales. As the city’s economy was built around the automobile industry, the city’s economy collapsed also and the city went through bankruptcy. Approximately 40% of Detroit’s population moved, which had other negative effects on the economy. Detroit’s rise and fall is a real example of how the PPF of an economy can affect not just the economy but the city and residents as well.III. The PPF: What We Know So FarPoints that are on the PPF trend line, like the points listed in the table above, are both possible and efficient. This is a productive PPF for a business as all resources are fully utilized. Points that are under the PPF trend line, such as the red square, are possible but they are not efficient. Some of the business’s resources are not utilized. Finally, points that are above the PPF trend line, such as the green triangle, are not possible as they go above the resource and technology constraints of the business.IV: The PPF and Opportunity CostRecall that opportunity cost of any item is whatever must be given up to obtain it. Moving alonga PPF trend line involves shifting resources (e.g. labor) from the production of one good to the other. Society faces a tradeoff, as getting more of one good requires sacrificing some of the other. The slope of the PPF is the cost of one good in terms of another. For this example, see thePPF chart on the next page. Recall that the value of the slope is rise/run, so as shown on the chart below, the value of the slope is riserun=−1000100=−10However, in economics it is important to not only find the value of something, but to understand what it means in the context of the problem. Here, -10 means that the opportunity cost of one computer is 10 tons of wheat.0 100 200 300 400 500 6000100020003000400050006000Production Possibilites FrontierComputersWheat (in tons)V: The PPF and Opportunity Cost ExampleGiven the two PPF graphs below, what is the opportunity cost of each? Which has the lower opportunity cost?100-10000 50 100 150 200 250 300 3500100200300400500600700EnglandClothWine0 50 100 150 200 250 300 3500100200300400500600700FranceClothWineTo find the opportunity cost of for each of the PPF graphs above, calculate the slope of each.France: y2− y1x2−x1=600−00−300=−2England:y2− y1x2−x1=200−00−300=−23Thus, France has a slope of -2 while England has a slope of -2/3. In France, to increase one unitof cloth, you must give up two units of wine. In England, to increase one unit of cloth, you mustgive up a two-thirds unit of wine. England, then, has the smaller opportunity cost. Opportunitycost and PPF are important concepts to understand as this will be the focus of the next chapter.VI: The Shape of the PPFThe PPF could theoretically be a straight line, but in reality it is bow-shaped. This is because the PPF depends on the opportunity cost as resources are shifted from one industry to another. If the opportunity cost is constant, then the PPF is a straight line. However, if the opportunity cost of a good rises as the economy produces more of it, then it is bow-shaped. An opportunity cost is, most often in the real world, not constant; this