Economics- The Final Frontier OPPORTUNITY COST AND THE PRODUCTION POSSIBILITIES FRONTIER Mr. Cline Marshall High School Economics Unit Two AB
Likewise, points that lie within the PPF remind us of inefficiency. These points are always possible to produce, but why would we want to? We would prefer to be on the curve with more of everything at the maximum efficiency possible. When an economy uses its resources inefficiently, however, this is where you end up. This is happens when some resources are unemployed, such as some of the land or labor not being used. It also happens if some of the resources are underemployed, that is if resources are used in a way that is not maximizing their output. For instance, if we take wet land and use it to cultivate wheat, and some dry land for rice, we are going to wind up with less grain than we can produce because wet land is better for rice and dry land is better for wheat.
You will also notice that the PPF is downward sloping, meaning that whenever we increase the production of rice, we must give up some production of wheat. In other words, this curve illustrates the opportunity cost of making more rice at the expense of less wheat. Wheat is the opportunity cost of rice, and vice versa.
We can use the PPF to calculate the opportunity cost as well. When we look at the curve we can see that when we increase rice production to 20 bushels, wheat production falls to 78 bushels, the change in the production of wheat is -2 bushels. The change in the production of rice is 20 bushels. If we divide the change in the production of wheat by the change in the production of rice, we come up with -2/20, or -1/10. In other words, the opportunity cost for 1 bushel of rice is.1 bushel of wheat when the production is between 0 and 20 bushels of rice.
Another way to examine it is if we use the formula for a slope, which is the rise divided by the run (rise over run) The rise is on the vertical axis, and the change in the rise is -2, and the run, the horizontal axis is 20. We come up with the same calculation, giving us the opportunity cost of a bushel of rice being.10 bushels of wheat. However, you will notice that when we get to 100 bushels of rice, the opportunity cost changes dramatically. Now, with 100 bushels of rice, we go from 38 bushels of wheat to none. So the rise is -38, and the run is from 80 bushels of rice to 100 bushels, or 20. - 38/20 can be reduced to -19/10 which equals -1.9, or the opportunity cost for 100 bushels of rice is nearly 2 bushels of wheat.
You can also see this in the curve itself, where at the top the curve is fairly flat, but as it gets closer to the bottom it gets steeper. This shows that the opportunity cost precipitously increases as you produce more of the commodity in the horizontal axis, in this case, rice. The reason the slope starts off flatter and gets steeper is that the economy is telling us that not all resources are equally well suited to the production of wheat and rice. Some are better suited to one or the other, hence why the production of rice gets more and more expensive the more of it you make. This means that that there is specialization of resources
This PPF tells us all of the same things the concave PPF does, with the following exception. The PPF on this graph is a straight line. It tells us that all of the inputs are perfectly suited for the production of either given output because it is a constant opportunity cost. In other words, there is no specialization of resources, one can be traded for the other easily. As an example, imagine that our resource is flour, and our outputs are either pie crusts or pastry shells.
This PPF tells us all of the same things the concave PPF does, with the following exception. The PPF on this graph is a vertical line. It tells us that there is no trade off between the production of the given outputs, or in other words, there is no opportunity cost. The lack of opportunity cost represented by the vertical shape tells us that all of the inputs are perfectly suited only for the production of one given output because there is no opportunity cost, so there is no specialization of resources, as the resource can only be used for one output only. For example, you can only make boxes with cardboard, not keys.
This PPF tells us all of the same things the concave PPF does, with the following exception. The increasing opportunity cost represented by the convex shape tells us that all of the inputs are not perfectly suited for the production of each given output because there are increasing opportunity costs representing that we are using more and more resources that are poorly suited to produce the given output. In addition, the greater increase in the opportunity cost near the bottom of the slope represents the economies of scale which is when more units of a good or service can be produced on a larger scale, yet with on average less input costs.
For example, the more time you spend doing something, the better you get at it, so the faster and easier it becomes to produce product, and therefore, the less opportunity cost for greater results. The curve flattens out as you reach the law of diminishing returns, which is when the resources dedicated no longer create increased production, but stagnate, or can lead to decreases in production. For example, four men working on something may get the job done quicker, but with six men, two will be standing around or getting in the way, increasing costs and hindering increased output.