Macroeconomics: Unit 1, Production Possibilities

CoursesMacroeconomics
LanguageEnglish Language

Transcript

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what do you make Well if you've got a bunch

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of sheet metal lying around for free somewhere on your

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property and you can have access to it for nothing

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Well you could try and just sell It is raw

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material But being the innovative entrepreneur that you are you

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think you can get more by making something out of

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it Raw sheet metal is a cheap commodity which is

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sold by hundreds of vendors and carries very low profit

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margins So you'd have to sell mountains of it Teo

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really make bank You know that everyone loves those slinky

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things You know that you khun stretch and wave and

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well they're pretty straightforward to make With very little effort

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you could start the shmoop line of sling keys or

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the you know Schlink ease if you will On the

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other hand you could also use your metal to make

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the super awesome robot of the future fellas a producer

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of goods You have to think about how you're going

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to allocate your resource Is the metal in the production

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of Schlink ease and robots Well the key goal here

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is to add as much value as possible so that

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you create a product that is difficult for competition to

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replicate and one that consumers want You know that they'll

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actually pay up for it by Rausch Middle Well you

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start out exclusively by making Schlink ease but realize that

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well maybe you want to start making some robots as

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well If you had unlimited meddled male maybe you could

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do both But alas scarcity The old folk continues to

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lurk in the shadows You have to give up some

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metal from your slinky production to make your robots so

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you'll find the flattest and sturdiest faces and leave the

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soft pieces that are easy to curl For The Schlink

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ease however the more robots you then choose to make

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while the harder it is to make them with less

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specialized material So you have to give up the production

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of a lot of Schlink ease to make only a

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couple of robot While this whole thing we're illustrating is

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the law of increasing opportunity costs So how much of

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each product should you produce Well let's say you have

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to pay three bucks a pound of metal and you

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buy 10 pounds for a total of $30 With your

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10 pounds of metal you can make five robots and

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sell them for $10 a body Or you can use

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that same metal to make 25 Schlink ease and sell

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them for $2 per slinky Well you could make either

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only robots and generate 50 bucks in revenue for $20

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in profit Or you could make on Leash Winkie's and

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generate $50 in revenue or $20 in profit either equal

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But since you know the production's possibilities curve is bowed

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and outwards He had shaped like that You know you

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could do better by well for example making 20 Schlink

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ease into robots like out here on the curb Since

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that combination lies on your production possibilities curve This combination

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would then generate $60 in revenue and $30 in notional

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profit Even the robot's think this is a good idea

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Well mapping all the combinations of Schlink ease and robots

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will give you a production Possibilities curves If you put

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all the data points out there it kind of creates

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that curve The production possibilities curve shows the trade off

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between producing two goods with limited resource is by showing

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all possible combinations of the quantities produced for each good

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Given a set of limited resource is you could make

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something easily for relatively low profit margins Like you know

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handicrafts are simple Products are or you can invest intellectual

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and financial capital to create highly engineered products that yield

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much larger margins Well understanding the production's possibilities curve is

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important in order to make decisions about allocating Limited resource

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is when make key to goods in order to maximize

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profits The shape of the curve means that you can

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use specialized resource is for each good and initially increased

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profits If you're producing a combo of Schlink ease and

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robots below the curve well that means that you'd have

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some sheet metal left over and could be making mohr

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of either one So you're not using your resource is

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perfectly efficiently That's why sometimes the curve is called a

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frontier because you can continue increasing your production of either

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and therefore your revenue right up until your producing right

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here on the curb and if you go out of

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business while this would be your a final frontier Star

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Trek joke But if you're truly and desperately needed to

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produce at a combination outside of the curve well your

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costs would go up probably dramatically like it's a completely

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different thing to make 4,000,000 Schlink ease a month and

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four and then your supply becomes a hassle Instead of

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continuing to get cheap steel from somewhere like Pittsburgh or

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China you might have to negotiate with highly unionized Belgium

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with all kinds of costs and shipping and other grief

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and no chocolate included with the sheet metal such that

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instead of costing a grand per shmoop ton well it'd

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cost five grand or worse for your supplies Yeah well

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any point outside the curve is a production level that

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is essentially unsustainable for more than a brief blip in

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time and he kind of regressed back to the curve

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One way or another machines can run hot People can

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work overtime for a while but eventually machines and people

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will start to break As the steel supply runs out

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bad things happen Your profit margins So yeah that's the 00:05:42.574 --> [endTime] law of increasing opportunity costs so there