Overview
This lesson explains the real-world shape of the Production Possibilities Frontier (PPF), focusing on the law of increasing opportunity cost and its economic implications.
Curved vs. Straight PPF Lines
- A straight PPF line suggests constant opportunity costs between two goods.
- In reality, the PPF is curved and concave to the origin, illustrating changing opportunity costs.
- The curved PPF better models how resources are allocated in the real economy.
Law of Increasing Opportunity Cost
- The law states that as production of one good increases, the opportunity cost of producing additional units rises.
- Opportunity cost is what is given up to obtain something else (the next-best alternative).
- Along a straight PPF, opportunity costs remain constant; along a curved PPF, they increase.
PPF Example: Econ Isle
- At 12 gadgets and 0 widgets, increasing widget production by 2 results in decreasing gadget production, but the number lost increases each time.
- Producing the first 2 widgets costs 2 gadgets; the next 2 widgets cost 4 gadgets; the final 2 widgets cost 6 gadgets.
- This demonstrates that as more of one good is produced, more of the other good must be sacrificed.
Reasons for Increasing Opportunity Cost
- Resources are not equally suited for all tasks; for example, some workers are better at making gadgets than widgets.
- As production shifts, the most adaptable resources are used first, then less suitable ones, raising costs.
Lessons from the PPF
- The PPF illustrates scarcity, opportunity cost, underemployment (points inside the frontier), and economic growth (outward shifts).
- Movement along the PPF shows trade-offs; moving toward the frontier shows better use of resources.
Key Terms & Definitions
- Production Possibilities Frontier (PPF) — A model showing maximum combinations of goods an economy can produce with given resources.
- Opportunity Cost — The value of the best alternative given up when a choice is made.
- Law of Increasing Opportunity Cost — The principle that producing more of one good results in greater opportunity cost per additional unit.
Action Items / Next Steps
- Review PPF diagrams with both straight and curved lines to practice identifying opportunity costs.
- Prepare examples of real-life situations where opportunity costs increase as resources are reallocated.