PPFs in Econ-Land
Step 1
Congratulations- you are in charge of a fictitious country, Econ-Land! The two products that are produced here are:
- Corn
- Radios
Your country is divided into 5 districts. You are in charge of deciding which product is to be produced by each district. Each district can only produce one type of product.
First, let’s assume that each district is equally good at producing each type of product. The summary is below:
|
District |
Production Levels |
|
All Districts |
3 corn units or 3 radio units |
Assign production to districts using the table below, using “Perfect Factor Substitution”. See what this looks like on the PPF. What do we notice about the shape of this PPF?
Step 2
Next, let’s assume that each different of Econ-land is slightly different; different regions are better-suited to producing certain goods than others. The differences are described in the table below:
|
District |
Description |
Production Levels |
|
1: Prime Farmland |
This is the best farmland in the whole country, great for growing corn. |
5 corn units or 1 radio unit |
|
2: Average Farmland |
This is average farmland- not the best, but okay. |
4 corn units or 2 radio units |
|
3: ‘Middle Land’ |
These are the exurbs, small towns, and all the places between the farms and the big city. |
3 corn units or 3 radio units |
|
4: Suburbs |
This is the outer region of the city, filled with houses and some office blocks. |
2 corn units or 4 radio units |
|
5: Inner City |
This is the urban area, full of factories, great for making radios. |
1 corn unit or 5 radio units |
Assign production to districts using the table below, using “Imperfect Factor Substitution”. See what this looks like on the PPF. What do we notice about the shape of this PPF?
Step 3
Now let’s assume that the districts of Econ-land are only suited to producing one type of good. The production is now summarised below:
|
District |
Production Levels |
|
1: Prime Farmland 2: Average Farmland 3: ‘Middle Land’ |
4 corn units 0 radio units |
|
4: Suburbs 5: Inner City |
0 corn units 4 radio units |
Assign production to districts using the table below, using “Zero Factor Substitution”. See what this looks like on the PPF. What do we notice about the shape of this PPF?
| District | Corn | Radios |
|---|
| Corn Production | Radio Production |
|---|---|
Questions:
- What is the opportunity cost of producing radios (in terms of corn) when we had perfect factor substitutability? Did the opportunity cost ever change?
- With imperfect factor substitutability, what is the opportunity cost of:
- Increasing Radio production from 0 to 5 units
- Increasing radio production from 14 to 15 units.
- Explain why the opportunity cost changes in the way you have described above.
- With zero factor substitutability, what is the opportunity cost of producing more radios or corn?
- Explain how differences in factor substitutability affect the shape of the PPF and the opportunity cost as you move along it.
- Extension: Explain how you could draw a PPF with imperfect substitutability the wrong way around, i.e. convex toward the origin. What would you have to do to achieve this? Why is this not a true PPF?