When the production possibilities curve is bowed outward the opportunity cost of producing more of one good?

We see in Figure 2.4 "The Combined Production Possibilities Curve for Alpine Sports" that, beginning at point A and producing only skis, Alpine Sports experiences higher and higher opportunity costs as it produces more snowboards. The fact that the opportunity cost of additional snowboards increases as the firm produces more of them is a reflection of an important economic law. The law of increasing opportunity cost holds that as an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase.

We have seen the law of increasing opportunity cost at work traveling from point A toward point D on the production possibilities curve in Figure 2.4 "The Combined Production Possibilities Curve for Alpine Sports". The opportunity cost of each of the first 100 snowboards equals half a pair of skis; each of the next 100 snowboards has an opportunity cost of 1 pair of skis, and each of the last 100 snowboards has an opportunity cost of 2 pairs of skis. The law also applies as the firm shifts from snowboards to skis. Suppose it begins at point D, producing 300 snowboards per month and no skis. It can shift to ski production at a relatively low cost at first. The opportunity cost of the first 200 pairs of skis is just 100 snowboards at Plant 1, a movement from point D to point C, or 0.5 snowboards per pair of skis. We would say that Plant 1 has a comparative advantage in ski production. The next 100 pairs of skis would be produced at Plant 2, where snowboard production would fall by 100 snowboards per month. The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. Plant 3 would be the last plant converted to ski production. There, 50 pairs of skis could be produced per month at a cost of 100 snowboards, or an opportunity cost of 2 snowboards per pair of skis.

The bowed-out shape of the production possibilities curve illustrates the law of increasing opportunity cost. Its downwards slope reflects scarcity.

Figure 2.5 "Production Possibilities for the Economy" illustrates a much smoother production possibilities curve. This production possibilities curve in Panel (a) includes 10 linear segments and is almost a smooth curve. As we include more and more production units, the curve will become smoother and smoother. In an actual economy, with a tremendous number of firms and workers, it is easy to see that the production possibilities curve will be smooth. We will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel (b). This production possibilities curve shows an economy that produces only skis and snowboards. Notice the curve still has a bowed-out shape; it still has a negative slope. Notice also that this curve has no numbers. Economists often use models such as the production possibilities model with graphs that show the general shapes of curves but that do not include specific numbers.

Figure 2.5 Production Possibilities for the Economy

As we combine the production possibilities curves for more and more units, the curve becomes smoother. It retains its negative slope and bowed-out shape. In Panel (a) we have a combined production possibilities curve for Alpine Sports, assuming that it now has 10 plants producing skis and snowboards. Even though each of the plants has a linear curve, combining them according to comparative advantage, as we did with 3 plants in Figure 2.4 "The Combined Production Possibilities Curve for Alpine Sports", produces what appears to be a smooth, nonlinear curve, even though it is made up of linear segments. In drawing production possibilities curves for the economy, we shall generally assume they are smooth and "bowed out," as in Panel (b). This curve depicts an entire economy that produces only skis and snowboards.

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A student asks…

Why is a PPF bowed outward? Why isn’t it just a line?

What is a PPF?

The quantities of goods and services we can produce are limited by our available resources and by technology. If we want to increase our production of one good, we must decrease our production of something else. The production possibilities frontier (PPF) is the boundary between combinations of goods that can be produced and those that cannot.

To illustrate a PPF, we look at a model economy in which the quantities produced of only two goods—lattes and sandwiches—change, and the quantities produced of all the other goods and services remain the same.

Figure 1 shows the PPF for lattes and sandwiches, which shows the limits to the production of these two goods. We can produce at any point inside the PPF or on the PPF, but we cannot produce outside the PPF. In Figure 1, producing at points A or B is attainable, but producing at point C is unattainable.

What is an opportunity cost?

The opportunity cost of an action is the highest-valued alternative forgone. The PPF makes this idea precise and enables us to calculate the opportunity cost. Along the PPF, there are only two goods, so only one alternative is forgone. To produce more lattes, we must produce fewer sandwiches. The opportunity cost of producing an additional latte is the number of sandwiches we must forgo. And the opportunity cost of producing an additional sandwich is the number of lattes we must forgo.

Why is a PPF bowed outward?

The short answer is: increasing opportunity cost.

The PPF is bowed outward because resources are not all equally productive in all activities. People with many years of experience working for Starbucks are good at producing lattes but not very good at producing sandwiches. So if we move some of these people from Starbucks to Subway, we get a small increase in the quantity of sandwiches but a large decrease in the quantity of lattes.

Similarly, people who have spent years working at Subway are good at producing sandwiches, but they have no idea how to produce a latte. So if we move some people from Subway to Starbucks, we get a small increase in the quantity of lattes but a large decrease in the quantity of sandwiches. The more we produce of either good, the less productive are the additional resources we use and the larger is the opportunity cost of one unit of that good.

Could a PPF be a line?

A linear PPF would arise if resources were equally productive in all activities. In our example, if all workers were equally good at producing lattes and sandwiches, then the PPF would be a line.

Could a PPF be bowed inward?

In cases with extreme specialization of labor or mass production, moving along the PPF would bring decreasing opportunity cost, and the PPF would be bowed inward.

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Practice: Why is a PPF bowed outward?