Relationship between production possibility curve and opportunity cost

relationship between production possibility curve and opportunity cost

The production possibilities frontier (PPF) is the boundary between those The opportunity cost of producing one more pizza is the marginal cost of a pizza. The marginal benefit curve shows the relationship between the marginal benefit of. Opportunity cost can be illustrated by using production possibility frontiers The production possibility frontier (PPF) for computers and textbooks is shown here. This is the difference between the maximum output of textbooks that can be. Follow the link for more information. Production–possibility frontier. From Wikipedia, the free encyclopedia. Jump to navigation Jump to search. A production–possibility frontier (PPF) or production possibility curve (PPC) is a curve which . In the context of a PPF, opportunity cost is directly related to the shape of the curve.

Opportunity cost is measured in the number of units of the second good forgone for one or more units of the first good. If the shape of the PPF curve is a straight-line, the opportunity cost is constant as production of different goods is changing.

relationship between production possibility curve and opportunity cost

But, opportunity cost usually will vary depending on the start and end points. In the diagram on the right, producing 10 more packets of butter, at a low level of butter production, costs the loss of 5 guns shown as a movement from A to B.

At point C, the economy is already close to its maximum potential butter output. To produce 10 more packets of butter, 50 guns must be sacrificed as with a movement from C to D.

The ratio of gains to losses is determined by the marginal rate of transformation.

Lesson summary: Opportunity cost and the PPC

Marginal rate of transformation[ edit ] Marginal rate of transformation increases when the transition is made from AA to BB.

The slope of the production—possibility frontier PPF at any given point is called the marginal rate of transformation MRT. The slope defines the rate at which production of one good can be redirected by reallocation of productive resources into production of the other.

It is also called the marginal "opportunity cost" of a commodity, that is, it is the opportunity cost of X in terms of Y at the margin.

  • Production–possibility frontier

It measures how much of good Y is given up for one more unit of good X or vice versa. The shape of a PPF is commonly drawn as concave to the origin to represent increasing opportunity cost with increased output of a good. The marginal opportunity costs of guns in terms of butter is simply the reciprocal of the marginal opportunity cost of butter in terms of guns.

Using the PPC, explain the concepts of scarcity, choice and opportunity cost. [10]

If, for example, the absolute slope at point BB in the diagram is equal to 2, to produce one more packet of butter, the production of 2 guns must be sacrificed. If at AA, the marginal opportunity cost of butter in terms of guns is equal to 0.

relationship between production possibility curve and opportunity cost

Shape[ edit ] The production-possibility frontier can be constructed from the contract curve in an Edgeworth production box diagram of factor intensity. That is, as an economy specializes more and more into one product such as moving from point B to point Dthe opportunity cost of producing that product increases, because we are using more and more resources that are less efficient in producing it.

relationship between production possibility curve and opportunity cost

With increasing production of butter, workers from the gun industry will move to it. At first, the least qualified or most general gun workers will be transferred into making more butter, and moving these workers has little impact on the opportunity cost of increasing butter production: However, the cost of producing successive units of butter will increase as resources that are more and more specialized in gun production are moved into the butter industry.

With varying returns to scale, however, it may not be entirely linear in either case.

Opportunity Cost & Production Possibility Curve by Jordan Potts on Prezi

Specialization in producing successive units of a good determines its opportunity cost say from mass production methods or specialization of labor. In other words, due to scarcity, society chooses what goods and services to produce.

The opportunity cost of a course of action is the benefit forgone by not choosing its next best alternative [definition of opportunity cost]. In other words, when society chooses what goods and services to produce, it is choosing what goods and services not to produce.

relationship between production possibility curve and opportunity cost

Suppose there are only two goods produced in the economy. The PPC shows all the different combinations of the two goods that can be produced in the economy when resources are fully and efficiently employed, given the state of the technology [definition of PPC]. Overview on how PPC reflects scarcity, choice and opportunity cost The side diagram is a production possibility curve. The PPC is a series of points rather than a single point.

Explanation and elaboration on how the PPC reflect scarcity An increase in the production capacity in the economy will lead to an outward shift in the PPC resulting in a decrease in scarcity and vice versa [point]. When the PPC shifts outwards, some of the previously unattainable points will become attainable.

Opportunity cost & the production possibilities curve (PPC) (article) | Khan Academy

The production capacity in the economy could increase due to an increase in the quantity or the quality of factors of production [explanation and elaboration]. Explanation on how the PPC reflect choice A change in the tastes and preferences of society will lead to a movement along the PPC which reflects a change in choice [point].

The tastes and preferences of society may change due to technological advancements [explanation and elaboration].

relationship between production possibility curve and opportunity cost

For instance, the invention of the smartphone and tablet computing has led to a change in the tastes and preferences of society towards electronic publications. As such, the market may be more inclined to produce more electronic publications [example]. Explanation on how the PPC reflect opportunity cost The PPC is concave to the origin because the opportunity cost of producing each good increases as its quantity increases [point].