Overview
This lecture explains why the production possibilities frontier (PPF) is typically a curved, concave line and illustrates the law of increasing opportunity cost in resource allocation.
The Shape of the Production Possibilities Frontier (PPF)
- The PPF is often drawn as a curved line concave to the origin, not a straight line.
- A straight PPF represents constant opportunity costs for producing goods.
- A curved PPF reflects that in reality, the opportunity cost rises as production of one good increases.
The Law of Increasing Opportunity Cost
- Lesson 5: As production of one good increases, the opportunity cost to produce each additional unit also increases.
- Opportunity cost is the value of the next-best alternative that is given up.
- When moving resources from gadget production to widget production, each step generally costs more gadgets per widget produced.
- The more a resource is shifted to a task it is less suited for, the higher the opportunity cost.
Comparing Straight vs. Curved Frontiers
- In a straight PPF, each 2-unit increase in widgets always costs 4 gadgets (constant opportunity cost).
- In a curved PPF, the opportunity cost increases:
- First 2 widgets cost 2 gadgets
- Next 2 widgets cost 4 gadgets
- Final 2 widgets cost 6 gadgets
Insights from the PPF Model
- The PPF shows scarcity: the limit of production with available resources.
- Moving along the PPF reveals opportunity costs between choices.
- Points inside the frontier show underused resources.
- Shifting from underemployment to the frontier shows economic expansion.
- The frontier moving outward indicates economic growth.
Key Terms & Definitions
- Production Possibilities Frontier (PPF) — a curve showing the maximum combinations of goods that can be produced with given resources.
- Opportunity Cost — the value of the next-best alternative forgone when a choice is made.
- Law of Increasing Opportunity Cost — as more of one good is produced, the opportunity cost of additional units rises.
Action Items / Next Steps
- Review the concept of opportunity cost and practice drawing curved PPFs.
- Prepare examples showing increasing opportunity costs with real-world goods.