Economic growth through investment | Microeconomics | Khan Academy

published on July 13, 2020

In the last few videos we've been talking about the production possibilities frontier is a relatively static thing something that you couldn't change but you could move along what I want to do in this video is think about maybe there are ways to change or expand

The production possibilities frontier and to do that let's assume that our little hunter-gatherer has decided to become a strict carnivore so he's only focused on rabbits now and his whole happiness in life is optimizing the

Number of rabbits he can catch and eat in a given day and so let's on one axis let's draw let's say the number of rabbits that he can catch in a given day so let's say it's 1 2 3 4 5 6 7 I could keep going on

And on so this right over here is rabbits rabbits that he can catch in a given day rabbits in a day but remember he wants to optimize this he wants to think about how he can increase his productivity of in terms of the number

Of rabbits and he knows we'll just assume that he knows how to build rabbit traps so now we're going to do a production possibilities frontier not between rabbits and berries but between rabbits and building rabbit traps so

Rabbit traps rabbit traps so maybe some type of he's able to get twigs together and you know he builds something puts the twigs together and a little thing you know it's a little box that maybe he puts a little I don't know some type of

Carrot down over there and then if the rabbit comes then takes the carrot then the Box falls on the rabbit or something like that we don't we don't have to go into the particulars of the actual trap but he can also spend his time building

Rabbit traps so let's say so it's one rabbit trap 2 rabbit traps and three rabbit traps and let's say we're going to hold all other things equals ceteris paribus so we're not worrying about other things and as we'll see in in most

Introductory economics class whenever you do a production possibilities frontier you're only doing it with two dimensions and so that's why you have a regular curve you could have one with three dimensions where you're doing the

Trade-off between three things but then you would have to have a three dimensional graph essentially the production possibilities frontier would be a surface but let's just function focus on this right now

Maybe I'll do a surface in the future just for fun so this are the rabbit traps and let's say the production possibilities frontier between rabbit traps and rabbits looks something like this he could spend all his time making

Rabbit traps but in that case he won't get any rabbits and he'll probably starve and that wouldn't be a good scenario or he could spend all of his time hunting for rabbits and he would catch on average 5 rabbits per day but

That would leave him no time to make rabbit traps so this is our current production possibilities I me let me just draw it this is our current production possibilities frontier so I'll call this P production

Possibilities frontier and I'll put a little a little zero subscript there that's our starting point so he could he could sit anywhere over here and he would have achieved productive efficiency anywhere on this curve but as

We saw if he just spent all of his time if he just spent all of his time doing this over here he'll never get any rabbit traps and so he won't be able to change the productive possibility frontier but what happens if instead he

Decides since he does want to build some rabbit traps so he decreases the number of rabbits a day to four and though that allows him to make one rabbit trap per day so he wants to hang out in this scenario so every day that goes by on

Average he's going to make four rabbits and he's going to build a rabbit trap so what's going to happen so as we go into the maybe into the next period he would now have a rabbit trap after just one day that he can use to help catch

Rabbits so that will actually change the production possibilities frontier so if he makes this investment it will actually allow him in a given amount of time to actually catch more rabbits so if he does that the production

Possibilities frontier having a rabbit trap won't make him that much won't allow him to make more rabbit traps in a day so the most rabbit traps he could make in a day is still going to be three but maybe now he can catch six rabbits a

Day so it might look something like like that so now he could either stop making rabbit traps and catch six a day just with that one rabbit trap he has or he could continue he could continue that and now actually

He can catch five rabbits a day and still make one rabbit trap a day and maybe he decides to do that but it could be anywhere along this production possibilities frontier so he could say or he could say hey you know I'm happy

Making eating the four rabbits a day I'm gonna make two rabbit traps now every day and now after another period he gets even more productive and so then the production so let me call let me call this one this is after one day

Production possibilities frontier after one day and then after two days let's say he did this scenario right over here now he's produced two rabbit traps and obviously this is maybe I'm exaggerating how quickly his productivity would grow

But maybe now the new production possibilities frontier looks like looks something like this he now has two rabbit traps so or he matched two more rabbit traps he already had once and I has three rabbit traps after two days

And so now if you want to devote himself purely to rabbit trapping he can get eight rabbits a day or he could do some combination in between and actually this curve it shouldn't go up at all I don't want to give you the impression that it

Went up and then down it just goes kind of straight does something like that right over here so this right over here I'll call that the production possibilities frontier – so what this hunter-gatherer is doing in this

Scenario right here is he is making an investment he is making an investment he is accumulating capital this right over here this is capital he is he is choosing instead of to consume all of his resources so there's two things he

Can do he can either spend all of his time in pure consumption getting as many rabbits as possible today and then eating them all pure consumption or he could reduce his consumption and then allocate some of his resources towards

Investment so this right over here this is an investment this is an investment it makes him more productive this right over here is consumption there's some base level of consumption he needs to survive but if he invests then it

Increases his overall productive capacity so if you viewed him as an economy by himself by investing instead of consuming all of his resources by investing some of his resources in this case his resources are as time as

Expertise by investing some of them he's able to increase his productivity and if you viewed him as an economy he's experiencing economic economic economic growth and so there's multiple types of investments and we'll talk about about

These in multiple videos in this case he is doing capital accumulation he is building tools that will make him more productive another type of investment is essentially technological change technological improvement which would

Actually make his tools even better so you can have a we could maybe draw another production possibilities frontier between making rabbit traps and then doing R&D on inventing new types of rabbit traps and so he could decide

Which of those two things he wants to decide between but what I wanted you to just appreciate in this video is that the production possibilities frontier can change you can become more productive if you do have investment in

R&D or capital accumulation and in this case that just happened to be rabbit traps

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