Monday, April 7, 2008
PPF for Cowboys - with Constant Opportunity Costs
In this example, we are considering two options for the work done on a ranch in an afternoon. Each cowboy has the ability to store 100 bales of hay in the barn if he devotes the entire afternoon to that activity. Alternatively, each cowboy could build 20 yards of fences if he spent the whole afternoon doing that. Other combinations are also possible. For example, if half of the afternoon is spent storing hay and the other half spent building fences, each cowboy could store 50 bales of hay and build 10 yards of fences. The opportunity costs in this example are constant. Since an afternoon can be spent either storing 100 bales of hay or building 20 yards of fences, the opportunity cost of an afternoon on the ranch is: Storing 100 bales of hay = building 20 yards of fences.
The graph above illustrates how the farm's production possibilities frontier (PPF) shifts further from the origin when the farm's resources increase from one cowboy to two cowboys. The slope of the PPF does not change because the technology (the productive ability of each cowboy) has not changed.
The primary economic lesson to be learned from this example is that an increase in economic resources (labor, capital, or natural resources) increases a society's ability to produce goods and services. If a society wants to increase its quantity of material possessions, one way to achieve this is by acquiring additional resources. This might include a conscious decision to invest more in education, technological research, and physical capital (such as factories and highways) or a change in health care (so workers stay productive longer) or immigration policy.