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## Opportunity cost and the Production Possibilities Curve

Current time:0:00Total duration:5:26

# PPCs for increasing, decreasing and constant opportunity cost

AP Macro: MOD‑1 (EU), MOD‑1.B (LO), MOD‑1.B.3 (EK) AP Micro: MKT‑1.C (LO), MKT‑1.C.3 (EK)

## Video transcript

- [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.