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eFarmer.us
Example: Corn vs. Soybeans
Production Possibilities Frontier
A mathematical model which shows efficient combinations of output produced given available factors of production and unchanged technology
Copyright 2012 eStudy.us [email protected]
Corn
Soybean
Illustrates the use of assumptions
Marginal decision making
Opportunity Cost
Increasing Opportunity Cost
Sensitivity Analysis (Changing Assumptions)
eFarmer.us
• Fixed resources• Technology unchanged• Fully employed
100 acresOne Tractor
Corn Soybeans
10,000 0
8,000 1,000
6,000 2,000
4,000 3,000
2,000 4,000
0 5,000
Copyright 2012 eStudy.us [email protected]
The opportunity cost of one bushel of soybean is two bushels of corn
Assumptions
3,000
4,000
6,000
2,000
10,000
Corn
Soybean5,0000
Production Possibilities Frontier
Efficient Production
eFarmer.us
Copyright 2012 eStudy.us [email protected]
Failed to use all the resource (less than 100 acres of land)
Corn
Soybean
10,000
Efficient
Unattainable
Inefficient
Can not achieve this combination of production with given resource and technology
All points on the line (curve) represent efficient combinations of output (using all 100 acres of land)
Scarcity limits an economy to points on or below the production possibilities curve
Production Possibilities Frontier
5,000
eFarmer.us
Corn Soybeans10,000 0
9,500 1,0008,500 2,0006,500 3,0003,500 4,000
0 5,000
Copyright 2012 eStudy.us [email protected]
Corn
Soybean
5,000
3,0003,500
6,500
1,0002,000
4,000
8,500
9,50010,000 One Corn for One Soybean
Three Corn for One Soybean
Now the farmer faces increasing opportunity cost as he continues to add soybeans in production
2000 3000 6500 3500 1000 3000
Soybeans Corn
1000 2000 9500 8500
1000 1000
Production Possibilities Frontier
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Suppose the farmer purchases more land
Suppose the farmer purchases a new tractor improving technologically
or
Copyright 2012 eStudy.us [email protected]
Corn
Soybean
5,000
3,0003,500
6,500
1,000
2,000
4,000
8,500
9,50010,000
Causes the production possibilities frontier to shift out allowing for the production of more corn and or soybean
6,000
12,000
Production Possibilities Frontier
eFarmer.us
Suppose technology improves for soybean but not for corn
Causes the production possibilities frontier to shift out for soybean but not for corn
Copyright 2012 eStudy.us [email protected]
A farmer producing only corn will see no value in the new technology.
Corn
4,000
10,000
Soybean
5,000
3,0003,500
6,500
1,0002,000
8,5009,500
A farmer producing only soybean will get full value from the technology. A farmer producing both will get some value from the technology.
6,0007,000
Production Possibilities Frontier
eFarmer.us
Will new technology determine the combination of production?
Copyright 2012 eStudy.us [email protected]
Farmers can use less land to product 4,000 soybeans
Corn
4,000 Soybean
3,500
Directing the remaining land to increase corn output from 3,500 to 6,800 Markets determine what to produce not technology
Original combination• 3,500 corn• 4,000 soybeansSuppose the world only wants 4,000 soybeans.
6,800
Production Possibilities Frontier
