Ceteris Paribus and the PPF

In economics there is a concept called the Production Possibilities Frontier (PPF). The PPF is a curved line that measures one variable against another.  It graphically represents a trade-off (increasing production of guns can only come about by decreasing production of butter, for example).

The Wikipedia illustrates the PPF with this image:

PPF illustration

The curved line is called the Production Possibilities Frontier because the line represent a border or a limit. Any point on the graph within or on the curve can be achieved,  but no point outside of it can be achieved. In the illustrations, production points A, B, C, and D can be achieved, but point X cannot.

So how do you get more guns and more butter? The curve in the illustration and the x and y axes form a quadrant of a circle. The line from the origin, where both x and y = 0, to point D is the radius of a circle. What happens if we increase the  radius until X becomes a point on the PPF? We get more guns and more butter at any point on the curve compared to the PPF with the shorter radius, ceteris paribus.

Ceteris paribus is a Latin phrase that means “all things being held equal” in English. In this illustration it means that the shape of the curve remains a segment of a circle as the radius grows, rather than becoming a segment of an ellipse or a rectangle or some other shape. This is because all the variables that determine the shape of the curve remain the same, other than the variable that determines the radius — if ceteris parabus.

Suppose the x axis of the graph represents all the money that has been produced and is spent in the U.S. economy in a year, and the y axis represents all the money that has been produced and saved in that year (in macro economics, savings = investment). We have now accounted for all the money produced in the U.S. in that year.  This graph will have a PPF curve, possibly, but not necessarily, a segment of circle as shown in the illustration.

Moving that curve outward would be good. We would gain the potential of increasing both savings and spending. How do we move the curve outward?

Economics says that we can do it three ways. Those ways are 1) increase worker productivity, 2) trade, and 3) import workers, e.g. immigration.

This is why classical economists say that increased productivity, increased trade, and increased immigration are always good for a nation’s  economy — ceteris paribus.

I will address why expanding the PPF is not a straight forward matter in a later post.

 

 

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5 Responses to Ceteris Paribus and the PPF

  1. ligneus says:

    I don’t suppose obama knows about this. I don’t suppose obama knows much about anything.

  2. ligneus says:

    Actually, even if he does know about it he’ll think it doesn’t apply to him, laws are for the little people, the ‘smartest man in the room’ can make his own laws.
    Same as he thinks compromise means the other side surrendering to his agenda.

    Right now, the two parties are split fundamentally on the issue of direction. The Democrats — not to mention the “experts” and so much of the political press — would have you believe it is a choice between forward and backward. Hence, Obama’s perfectly hackneyed slogan “Forward!” According to this formulation, reasonable compromise amounts to acquiescing to the direction Obama and the Democrats want to go, but demanding concessions on how fast we get there and by what means.
    Forward vs. backward
    From the conservative perspective, this is madness. It is like saying Republicans must agree to let Obama drive the country off a cliff, but Democrats must be willing to negotiate how fast the car goes. And if a Republican counsels hitting the brakes or pulling a U-turn, he is dubbed “extreme” by the establishment cognoscenti.

  3. Lee says:

    how does improved technology affect the radius? wouldn’t it increase it?

  4. sz says:

    fascinating stuff, thanks for these explanations! I have little to say as I lack sufficient knowledge, but am quietly reading as you post, just so you know!

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