Course: AP®︎/College Macroeconomics > Unit 1Lesson 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
PPCs for increasing, decreasing and constant opportunity cost
We explore three different production possibility curves for the rabbits and berries example. Each curve has a different shape, which represents different opportunity costs. The bowed out (concave) curve represents an increasing opportunity cost, the bowed in (convex) curve represents a decreasing opportunity cost, and the straight line curve represents a constant opportunity cost.
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- All of this talk of opportunity cost, how is it helpful for companies?(12 votes)
- It is helpful because companies can use these graphs to figure out how much of each good they should produce with their available resources.
For example, an electronics company can graph how many large and small televisions they could make. Lets say if they only produce large televisions, they can produce 10 and if they only produce small televisions they can make 30. They can graph this information and decide what is more profitable for the company to produce. Usually its something along the production possibilities frontier curve because that is most efficient, say 6 large tv's and 20 small tvs. I know most companies can make more than 2 different goods, but it is a simplified example(60 votes)
- Do these apply for the independent variable only? For example, you want to get more berries and you are giving up rabbits. Is the graph with the curve bowing out still going to be an increasing opportunity cost?(12 votes)
- In a PPC there is not a dependent or independent variable. The PPC describes a tradeoff, so anytime you increase the production of one good, you give up production of the other good. Any PPC that is bowed out is exhibiting increasing opportunity costs.(16 votes)
- Sal claims in one of these videos that any given point on the PPF is the most efficient point you could achieve. However, due to opportunity costs, it is easy to see that for an outwards-facing PPC the most efficient use of one's time would be to spend equal amounts of time on both goods, and thereby catch all the easiest rabbits and berries, but none of the hardest, while for an inwards-facing PPC, one ought to solely specialize in one area. So is the matter of efficiency on the PPF just a matter of how far you can get from the origin? Or is there more to it?(8 votes)
- This is my personal interpretation of it: each point on the PPC are the most efficient for that particular combination of goods. Efficient combinations means that all resources are utilized, and it is impossible to produce more goods without losing some of another good (i.e. there is an opportunity cost).
While it might be more efficient to spend equal amounts of time on both goods (in terms of labor), this also depends on how much one and others value each good, as well as what one does with a good. Efficiency in that sense cannot be determined with just a PPF graph.(11 votes)
- can this hunter get 2 rabbits and 80 berries?(2 votes)
- Yes! Anything inside the PPC is possible. It's just not efficient. For example, let's take the simplest PPC on the left with constant opportunity costs. If he operates on his PPC, he can produce 2 rabbits and 180 berries. Suppose the hunter splits 10 hours a day between hunting and berry collection, and if they use all of that time 180 berries and 2 rabbits is just one of the possible outcomes. If instead they decide to spend a few hours wasting time and staring up at the sky, then they end up with less production.(8 votes)
- Hi Sal,
so in a case of a decreasing opportunity cost,it better to get another rabbit up until when?(5 votes)
- what does a straight line on a graph mean?(2 votes)
- In a graph in general a straight line means that any change in the variable on the horizontal axis is associated with a change on the vertical axis, and those changes are the same no matter what. For example, every time the horizontal variable changes by 5, the vertical variable changes by -2.
In a PPC, this translates to the opportunity cost of one good being identical no matter how much of it is being produced. At every point along the PPC, opportunity costs are the same if the PPC is a straight line.(2 votes)
- So which one of the models are the most efficient(2 votes)
- I do agree with constant O.C, but how is decreasing or increasing O.C possible in real life. Can anyone give an example?(1 vote)
- Using the rabbit and berries example, the berries might be clustered around your camp. So the first couple of berries are easy to get. But once you finish with those berries, you have to venture farther where the berries are more spread out. That is less efficient so it has a higher opportunity cost. That means the opportunity cost in increasing.(3 votes)
- if one has to choose between studying course A and course B, it is a decreasing opportunity cost because the more one study course A, the more he masters it and the less he has to study it. The time remaining is used to study course B. Am I totally right, partially right of wrong ?(2 votes)
- My daughter has this problem. In a Ricardian model of two goods and one factor with output candy 6 pounds per hour is priduced and wine 2 gallons per hour. Draw the production possibilities frontier for candy and wine given that there are 20 hours of labor available(1 vote)
- First, let's figure out the total number of each you can produce. 20 hours/2 gallons is 10 gallons of wine per day. 6*20 = 120 lbs of candy per day.
Now to draw the PPF, create the x and y-axis, like the ones in the video. I personally like having the large number in the y-axis, so I would label that lbs of candy. Then label the other axis gallons of wine.
Now, keep in mind the opportunity cost. You are giving up 6 lbs of candy if you choose to make wine for one hour. Vice versa, you would be giving up 2 gallons of wine per hour that you choose to make candy.
So if you labelled the x-axis as gallons, start with 0 gallons of wine and 120 lbs of candy. (This means you are spending all of your time to make candy and no time will be allocated to wine.) Put a point here.
Next, let's say we want to make 2 gallons of wine. The opportunity cost of 2 gallons (or one hour of time) is 6 lbs of candy. So put a point at (2, 114).
Continue this process of adding 2 gallons/subtracting 6 lbs of candy until you reach the end, then connect them all. Keep in mind, this is assuming the opportunity cost is constant.(1 vote)
- [Instructor] So we have three different possible production possibility curves for rabbits and berries here, which we've already talked about in other videos, but the reason why I'm showing you three different curves is because these three different curves clearly have different shapes, and we wanna think about why you would have and under what scenarios would you have these different shapes? Here, our production possibility curve, or our PPC, it looks like a straight line. Here, it looks like it's bowed out from the origin, it looks like it's popping out in that direction. And here, it looks like it's bowed in to the origin, it's popping in in this direction. So the first thing I'm going to do is ask you a question. Which one describes the scenario where for every extra rabbit I catch, every incremental rabbit, I'm giving up more and more in terms of berries? Or another way of thinking about it is, as I catch more and more rabbits, the opportunity cost in terms of berries is increasing. Which one of these curves describes that? Well some of you might have already seen the video on KhanAcademy, on increasing opportunity cost, and you might recognize that this curve here. But let's just review it, so there's a world where I'm eating all berries, and I can get, I can pick 300 berries a day, but maybe I decide to go after that first rabbit that just likes to hang out and play with my knives, and so when I catch that, it's very easy to catch, so I don't give up a lot in terms of berries, especially because I'm probably not, the berries I'm giving up are probably the ones that are hardest to pick. And so let's say that first rabbit, the opportunity cost, I pick 20 less berries, so notice, when I increase the rabbits by one, my berries go down by 20, so my opportunity cost is 20 berries for that first rabbit. But let's say that second rabbit is a little bit harder to catch, and I'm not giving up the quite so hard to pick berries, and so when I pick that next, or when I hunt that next rabbit, I should say, then I've given up 40 berries. So notice, my opportunity cost has increased. For that first rabbit, my opportunity cost was 20 berries. For that second rabbit, my opportunity cost is 40 berries. And it keeps going, then third rabbit, I'm going to give up 60 berries. That fourth rabbit, I'm gonna give up 80 berries, 80 berries, and then last but not least, that fifth rabbit, which is the most that I can hunt in a day, I'm gonna give up 100 berries 'cuz here, I'm going after the really nimble rabbit, the really sly rabbit, and I'm giving up literally the low-hanging fruit in terms of berries, the one, they might be on the ground, just ready for me to pick up, and so, the important realization from this video is this bowed out shape right over here, this is describing an increasing opportunity cost. Let me write that down, increasing, increasing, O.C. for opportunity cost. So with that out of the way, which of these would describe a decreasing opportunity cost? Maybe you could imagine a scenario where every incremental rabbit I catch, I get better and better at catching rabbits. Well you might guess that, well look, if this one is increasing and I'm bowed out, then being bowed in would be a decreasing opportunity cost. Decreasing opportunity cost, and let's make sure that it makes sense, so we could go back to the scenario where we're doing nothing but picking berries, and let's say that first rabbit, so we're gonna talk about a different scenario now, that first rabbit, I had to train myself to be able to get rabbits, I have to buy the tools, I have to stretch, it takes me a lot of effort to get that first rabbit. And so, there, I give up 100 berries, so my opportunity cost for that first rabbit was 100 berries. But then for that second rabbit, my opportunity cost is 80 berries. Maybe now, I've kind of gotten the hang of it. I've already bought my rabbit catching shoes. I've already invested in that. I'm all stretched and limber, maybe those rabbits like to hang out together, and so that keeps on going. So that third rabbit, my opportunity cost is 60 berries. I'm getting really good at catching rabbits, so clearly, you see here, that for each incremental rabbit I get, my opportunity cost is decreasing, all the way to that fifth rabbit, maybe my opportunity cost is 20 berries. To catch that next extra rabbit, I'm giving up those 20 berries. So very clearly, you see a decreasing opportunity cost. And so, by deductive reasoning, you might be able to say, "Well, okay, this straight line must represent "a constant opportunity cost." And that is, indeed, what it shows. For every rabbit, every rabbit you catch, you're giving up exactly, you're giving up exactly 60 berries, every time I catch a rabbit, I give up 60 berries, so my opportunity cost for rabbits, in terms of berries, is just a constant 60. And so this is a scenario, if you were imagining in this fictional world we created, where every rabbit is about as easy to catch as any other one, and every berry is about as easy to pick or find as any other one, and so, the trade off, the amount of time I spent for each incremental rabbit, I'm giving up a fixed amount of berries. No matter how many rabbits I go for, and no matter how many berries I am currently at, so that's a constant opportunity cost, when you have a straight line.