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1.5.2 shape of the PPC: constant and increasing opportunity costs

1.5.2 shape of the PPC: constant and increasing opportunity costs

Shape of the PPC

Definition

Opportunity cost: the next best alternative forgone when a choice is made, shown on a PPC by how much of one good is sacrificed to gain more of the other and measured by the slope of the curve.

  1. The shape of a PPC depends on how opportunity cost changes as production is switched between the two goods.
  2. A straight-line PPC shows constant opportunity cost, while a bowed-out PPC shows increasing opportunity cost.
  3. The difference comes from how easily resources can be moved from making one good to making the other: if they switch freely the cost stays flat, but if they are specialised the cost rises.
Key Idea
  • A straight line means every extra unit of one good costs the same amount of the other good.
  • A curve bowed outwards from the origin means each extra unit costs more of the other good than the last.
    • This rising sacrifice is what is meant by increasing opportunity cost.

Constant opportunity cost

  1. Constant opportunity cost arises when resources are equally suited to producing either good.
  2. Switching resources from one good to the other then always sacrifices the same amount, because no resource is any better at one task than the other.
  3. Because the sacrifice never changes, the PPC is a straight line with a constant slope.
Example
  • Suppose an economy gives up 10 units of good Y for every 5 units of good X it gains, at every point.
  • Moving from 0 to 5 units of X costs 10 units of Y.
  • Moving from 5 to 10 units of X costs another 10 units of Y.
Opportunity cost=10 Y5 X=2 Y per unit of X \text{Opportunity cost} = \dfrac{10\text{ Y}}{5\text{ X}} = 2\text{ Y per unit of X} Opportunity cost=5 X10 Y​=2 Y per unit of X
  • So each unit of X costs 2 units of Y throughout.
    • Because the cost per unit never changes, the PPC is a straight line.

Increasing opportunity cost

  1. Increasing opportunity cost arises because resources are not equally suited to producing both goods.
  2. As output of one good rises, ever less suitable resources must be switched across, so more of the other good is sacrificed each time.
  3. The rising sacrifice makes the PPC bow outwards from the origin.
Example
  • Suppose the economy produces wheat and cars and starts with all resources on wheat.
  • The first 10 cars cost only 5 units of wheat, because the first resources moved (engineers, city land) are well suited to car making.
  • The next 10 cars cost 15 units of wheat, as fertile farmland and farm workers, poorly suited to cars, must now be switched.
    • The rising cost per batch (+5 then +15) bows the curve outwards, showing increasing opportunity cost.

Why bowing is normal

  1. In the real world factors of production are specialised, so they are rarely equally good at making every product.
  2. This specialisation makes increasing opportunity cost, and so the bowed curve, the usual case.
  3. The straight-line PPC is a simpler special case used to isolate the idea of constant cost; whether it applies depends on how interchangeable the resources really are.

Shape of the PPC: constant and increasing opportunity costs

Note
  • The steeper the curve becomes, the higher the opportunity cost of the good on the horizontal axis.
  • A straight line is realistic only when resources are perfectly interchangeable between the two goods.
    • In practice this rarely holds, so the bowed shape is drawn by default.
Exam technique
  • Draw a bowed-out curve when opportunity cost increases and a straight line when it is constant.
  • Read the slope to state how much of one good is given up for the other.
  • Support any claim about the shape with the behaviour of the resources behind it.
Common Mistake
  • Do not assume every PPC is a straight line.
    • Increasing opportunity cost, and so a bowed curve, is the normal case.
  • Do not describe the slope as the price of a good.
    • The slope shows opportunity cost measured in units of the other good.
Self review
  • What shape of PPC shows constant opportunity cost, and why?
  • What shape shows increasing opportunity cost, and why?
  • How does resource suitability explain the bowed-out shape?
  • Using numbers, show what increasing opportunity cost looks like.
  • What does the slope of the PPC measure?
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Two PPCs comparing increasing and constant opportunity costs, with hamburgers on the vertical axis and laptops on the horizontal axis

A production possibility curve, or PPC, shows the maximum combinations of two goods an economy can produce using its available resources efficiently. Its downward slope represents a trade-off: producing more of one good requires giving up some of the other.

The shape of the PPC depends on whether opportunity cost stays the same or rises as production changes. A straight-line PPC shows constant opportunity cost, while a PPC bowed outwards from the origin shows increasing opportunity cost.

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The opportunity cost of gaining one good, measured in units of the other good.

1.5.2 shape of the PPC: constant and increasing opportunity costs Revision Guide

  1. Intl A Level
  2. /Economics
  3. /1.5.2 shape of the PPC: constant and increasing opportunity costs

Revision notes for CIE Intl A Level Economics 1.5.2 shape of the PPC: constant and increasing opportunity costs: explanations and worked examples.

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