So now you know that graphs can be used to illustrate an individual's choices.
What about the choices facing a society?
Well, who makes decisions on behalf of society?
The government.
What kinds of things does our government provide for us? [pause] Well, they provide things
like roads, education, national defense, our justice system, research, unemployment benefits
-- the government’s trying to do an awful lot of things for us all the time.
In a sense the government is just like us -- they're trying to fulfill THIS many needs,
with this many resources.
So, how do I tell this story using a graph?
First, I want to narrow down the categories of things that the government tries to provide
to two.
Why only two?
Oh yeah -- I can only draw two.
OK, let's say that our society has two categories of goods and services: military (things like
national defense and antiterrorism programs, etc.) and civilian (which might include roads,
parks, or low income support).
You, as the economic analyst, have no say in what the society should do with its resources,
but you can examine what we could do.
If society takes every bit of its resources -- ALL the land, ALL the labor, ALL the capital,
and ALL the entrepreneurial ability -- and puts it into the production of military goods
and services, let’s say that we can produce 5000 units of military output.
But this leaves NO resources to produce civilian goods, so we would have ZERO units of civilian
output.
Note that I'm not making any judgment as to whether this is a good idea or bad idea; just
that it’s a possible choice that can be made.
What if you want to consider having some roads, or schools, or parks?
Let's say that you're considering building 1000 units of civilian goods – maybe 1000
schools, or 1000 miles of road – where will the resources to produce 1000 units of civilian
goods come from?
[pause] That's right -- you would have to take the resources away from military production.
So military MUST decrease, let's say, to 4800 units.
What's that?
You think I’ve made some kind of a mistake?
How could I possibly gain 1000 units of civilian goods, and only sacrifice (or have an opportunity
cost of) 200 units of military goods?
Well, consider this: what if “civilian” represents elementary schools, and “military”
is stealth bombers?
Which one do you think takes up more resources?
There's no reason why there would have to be a one-for-one trade off.
In fact, it would be unrealistic and restrictive to assume this.
OK; so what if I want more civilian goods -- 2000 schools, or 2000 miles of road -- then
what?
Yup -- we would have to shift more resources away from military production, so that now
civilian is 2000, but military is only 4500.
This time you're sure I’ve made a mistake?
How could I have sacrificed only 200 military initially, but now I'm giving up 300 military?
No mistake; instead of constant opportunity cost, as we had with the grades example, we
now have increasing opportunity cost, where our sacrifice will just keep getting bigger
and bigger.
A PPC that shows increasing opportunity cost is actually much more representative of how
the world works.
It happens when resources are not as perfectly well-suited for one type of production as
the other.
I’ll come back to this in another video segment.
Following this pattern of increasing opportunity cost, let's complete the table.
To get 3000 civilian goods, you drop to 4000 military; to get 4000 civilian, you drop to
three 3300 military; to get 5000 civilian, you drop to 2000 military, and if you used
every bit of society's resources for civilian output, you’ll have 6000 units of civilian
goods, but not have any resources left for military production.
Again, as the economic analyst, it isn't your job to decide which of these combinations
is good or bad.
So who does get to decide?
[pause] That's right -- the government.
Let's say that you’re not only an economic analyst, but you're also presenting your data
to the White House.
Visuals are good so take a few minutes now to pause this video, and map out the combinations
-- with the military on the vertical axis, and civilian on a horizontal.
[pause]
Hopefully yours look something like this.
Again, it illustrates the inverse relationship between military and civilian production;
the bowed-out shape shows the increasing opportunity cost.
You bring the charts and figures and explain to the president, “Mr. (or Mrs.) President,
this is the production possibilities curve -- sometimes referred to as the production
possibilities frontier, since it shows the outer limit of what can be produced with our
current resources.”
What point will the President pick? [pause] Right again - it depends.
Depends on what?
Well, it could be any number of factors: political ideology could determine where the president
would pick.
Your typical, or average, Republican, if there is such a thing, tends to lean more toward
military – this is classic “Reagan” behavior.
Democrats are often viewed as the “spenders,” more on social programs, closer to the civilian
axis.
Could be world events; in the early 1990s, after the fall of the Berlin Wall and the
Soviet Union, we moved away from military axis.
But after 9/11, we moved toward the military axis.
So the President thinks it over carefully, and finally says, “I choose… point H.”
What do you tell the president?
[pause] Hopefully, you're making your response respectful, because, after all, this is the
president, so how about something like, “Oh, I'm sorry Mr. (or Mrs.) President – but
perhaps I’ve miscommunicated something to you.
This line -- the production possibilities curve -- represents the outer boundary of
what we can produce right now, even if we used all of the available resources.”
To which the present responds, “Ah yes, you did make a mistake – but I see now.
I choose Point…
I.” What do you tell the president?
[pause] ”Well, Mr. (or Mrs.) President, you certainly COULD choose Point I, but then
we would have resources going to waste.”
In particular, you might point out that unused resources are UNEMPLOYED resources.
More specifically, unemployed labor makes for unhappy voters -- that usually works with
politicians.
The point is that while you, the economic analyst, do the positive analysis, ultimately,
the government decides where we should produce -- the normative analysis.
You demonstrate the possible outcomes, and it's up to the policymakers to make the final
choice.
NEXT TIME: How changes in resources affect the PPC.
TRANSCRIPT00EPISODE 9: SOCIETAL PPC