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## AP®︎/College Macroeconomics

### Course: AP®︎/College Macroeconomics > Unit 1

Lesson 2: Opportunity cost and the Production Possibilities Curve- Production possibilities curve
- Opportunity cost
- Increasing opportunity cost
- PPCs for increasing, decreasing and constant opportunity cost
- Production Possibilities Curve as a model of a country's economy
- Lesson summary: Opportunity cost and the PPC
- Opportunity cost and the PPC

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# Increasing opportunity cost

The concept of opportunity cost in economics can change depending on the scenario. For example, there might be a trade-off between hunting for rabbits or gathering berries. As one pursues more rabbits, the opportunity cost (in terms of berries given up) increases. This phenomenon is illustrated graphically with a bow-shaped curve. Created by Sal Khan.

## Want to join the conversation?

- What types of events could cause a shift in the productions possibilities frontier?(19 votes)
- New Technology which increases the productivity of existing resources

New resources: more Labor, more Land(eg. rabbit population increases), investing resources to produce Capital (eg. making more bows to hunt rabbits)(18 votes)

- Is increasing opportunity costs the same as diminishing returns?(17 votes)
- They describe the same situation but are different statements, in the same way as asking are 'a is less than b' and 'b is greater than a' the same.

The opportunity cost of something measures the price, whereas the return is measuring how much your payment of inputs is worth, so if the ppf is showing that rabbits get more expensive in terms of lost berries the more rabbits you have, that's equivalently a diminishing marginal return on the input (potential berries given up) and an increased opportunity cost on the output (expensive rabbits). Rabbits go up in price = giving up berries gets you less and less per berry given up.

Opportunity costs are always about something that didn't happen, returns are the production from an input, so you can see how a ppf is better suited to describing OC's than returns, because defining the 'input' to getting rabbits as 'not getting berries' is awkward.

It might be easier to think of time as an input, decreasing your marginal return on time is more natural than a decreasing return on 'not having berries', but notice nothing in this example says the 5th rabbit takes more time than the 4th, it just gives up more berries. Maybe all berries are equally easy to pick but the rabbits get increasingly crafty. OR maybe all rabbits are equally simple to catch but the berry bushes grow increasingly far from your home. The curved ppf could represent some very different scenarios.(13 votes)

- So, what if I'm hunting the easy, not witty rabbits, and ALSO gathering the easy berries?(5 votes)
- That would be the point on the graph in purple labeled inefficient, because you are not using all your time to pick/hunt. You are just getting a few, and then you would have time to spare.(10 votes)

- I laughed out loud when Sal said the rabbit was kind of asking for it LOL!(14 votes)
- I understand the video, however I had a question about whether this contradicts economies of scale. For example: how Apple probably spends $100 to manufacture an ipad, but if I was to start a new company, I would probably spend $1,000 to create my first ipad.(5 votes)
- This doesn't contradict economies of scale. Economies of scale occurs when your sales increase but your fixed costs remain constant. This means that your total cost to build 1 unit goes down because the fixed costs are allocated over a greater amount of units sold.(6 votes)

- How can we say that first we shift best resources and after that less effective ones,as we take assumption that ALL given resources are efficiently and effectively used?(5 votes)
- Our skill, our technology or anything else doesn't change. We work as effeciently as we can all the time. But it simply takes more time to find the more hidden berries, or hunt those faster rabbits.(5 votes)

- What would happen if another party was taking the same resources as you in the same place?(3 votes)
- That is why we say all else equal it is like science when they tell you a certain factor is negligible so that we can asses a problem easily. Anyway we don't factor in another person working where we are foraging or hunting because it would be difficult to factor in.(4 votes)

- What if you hired workers for your earnings(3 votes)
- Then some of your profit would be split evenly between you your workers and then your company(4 votes)

- Can a PPF be illustrated by a straight line?(4 votes)
- The PPF can be represented by a straight line when, for example, you are comparing two very similar products. See the link above provided by Carol Bruce.(0 votes)

- why does it only cost 20 berries to go from 0 to 1 rabbits, and 100 to go from 4 to 5?(2 votes)
- Yeah pltc. has a good point, the first rabbit may be easy to get but the less rabbits there are in this small environment the longer and more difficult it is to find and catch the next rabbit therefore allocating less berries per rabbit. Also, same thing with berries, in time, there will be less berries to find and therefore it takes more of your time to search for them and pick them.(1 vote)

## Video transcript

What I want to do
in this video is think about how the
opportunity cost can change as we move from
scenario to scenario. And this is going to be
particular to this example, but it's a phenomenon
that you will see in many economic scenarios. So let's say we're
starting off in Scenario F. We are vegetarians. We are only getting berries. We are not spending any
time going after rabbits. But now we're starting to,
I guess, crave protein. And we say, well, what is
going to be the opportunity cost if I go for
that extra rabbit? If I go for that extra rabbit,
then what's going to happen? Well, I'm going to have to stay
on my production possibilities frontier. And so I'm going to
move to Scenario E. So if I go after that
one extra rabbit, I'm going to give up 20 berries. So my opportunity
cost in Scenario F, sitting in Scenario
F, of going after that 1 rabbit is 20 berries. Now let's keep going. What happens if
I'm in Scenario E? I'm already, on
average, eating 1 rabbit or finding 1 rabbit a day. And I want to go
to 2 rabbits a day. What am I going to give up? Let me do that in
that same color. What will I give up? Well, now I am going
to give up 40 berries. This is interesting. Now let's say
we're in Scenario D and we want even more rabbits. We're really starting to
become carnivores now. What am I going to give up? Well, I'm going to
give up 60 berries. If I'm able to get 3 rabbits,
every day, on average then I'm only going to get 180
berries now instead of 240. And let's just keep going. So if I want yet another
rabbit every day, then I'm going to have
to give up 80 berries. And then finally, just to
feel some sense of completion, if I become a complete
carnivore and if I want to get on average,
5 rabbits a day, I'm going to have to give
up another 100 berries and go to not having
any berries at all. And so you might see
something interesting. The more squirrels--
sorry, not squirrels although I guess they're
similar-- the more rabbits that I'm going
after, every time I try to go after another
incremental rabbit I'm giving up more and more berries. My opportunity
cost is increasing. And so this phenomenon,
it's not always the case but it's the case in this
example, increasing opportunity cost. Increasing
opportunity cost as we increase the number of
rabbits we're going after. And you could do
it the other way. You could say, OK,
as we increase-- especially if you did
it on a unit basis, if you said every incremental
berry or every incremental 100 berries we're going after,
but the numbers aren't as easy right over here--
you'll actually see something going
the other way. But the question, an interesting
question is, OK, Sal. You set up the numbers like
this earlier two videos ago. But why would this make sense? Why is this idea of
increasing opportunity cost showing up in a lot
of different economic, and you can call this
an economic model. We have simplified our economic
reality, the choices that we have to make, down
to two variables the number of rabbits
we have to go after or the number of berries. But why does this show
up in economic models? And just to be clear, it does
not show up in all of them. But to think about our
example, as a hunter gatherer, we started here in
Scenario F. In Scenario F, we've decided to not
pursue any rabbits. Even the slower,
not so quick witted rabbit who maybe likes to hang
out with you, next to you, and it likes to play with your
spears or your bow and arrow-- you are not even going
after that rabbit. Instead you are choosing
to spend all of your time on the berries. And not only are you
getting, literally, the low hanging fruit,
the easy berries, you're getting the
berries that are further up the bush, the berries that
you have to get cut by thorns to get, the berries that you
have to climb trees to get. So you're getting even
hard to get berries and you're not going after
even easy to get rabbits. But now all of a
sudden if you say, well, you know, that rabbit
who's been hanging out with me, he's been kind of asking for it. And so that was
very easy to get. It didn't take much
time on a given day to get those really easy rabbits
who like to hang out with you. You're not give a lot
in terms of berries. One, it didn't take you much
time to get those, literally, those slow and maybe less
quick witted rabbits. And you're giving up,
in that same amount of time, the very
hard to get berries. So you're only going to
give up about 20 of them. Now if you want to
2 rabbits a day, not only are you going to get
the slowest of the rabbits, the ones that aren't
afraid of humans, now you're going to have go get
the slightly faster rabbit-- the slightly faster rabbit, who
wants to die a little bit less and is maybe a
little bit sharper. And you're now not
giving up the berries that are way up in the tree and
that are protected by thorns. You're giving up berries that
are closer down the trees. So this is going to take
you a little bit more time to do than this
right over here. And in that little
bit more time, you're also giving up berries
that were easier to get. And so this phenomenon is
going to happen all the way until in this scenario we're
trying to get 5 rabbits a day. You are literally going after
the quickest and the smartest rabbits. But you insist on going for
them and in your pursuit of these quick, fast rabbits
you're even ignoring berries. You're literally, like,
stepping on berries. You're not eating the berries
that are right next to you because you're so obsessed
with eating rabbits. So hopefully that
gives you a sense of why increasing opportunity
cost does show up. And when you graphically show
it in terms of a production possibilities frontier, it shows
up in this bow-shaped curve. And you can see it, because
as we go from this point to this point, you see
that as we increase one the slope, the negative
slope, is increasing. Or another way to think
about, in Scenario F, the slope is roughly like this. And I encourage you to
review the algebra playlist if the idea of slope
is confusing to you. But at F, the
slope is like that. I'm drawing the slope of the
tangent line right over here. At E it gets even steeper. You're giving up even more of
the berries per unit rabbit. And now in D you're
giving up even more. And then you're
giving up even more. And so whenever you
see a bow-shaped curve like this, so a curve that
literally looks like this, this shows that you have
increasing opportunity costs. As you increase
more and more units, you're going to
have to give up more and more of the alternative.