How Does A Production Possibilities Curve Illustrate Opportunity Cost?


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Production Possibilities Curve - a graph that indicates all the possible combinations of two goods or services (or aggregates of goods and services) that can be produced within an economy given the full and efficient use of all available resources.Opportunity Cost:-The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative actionmason.gmu.eduOpportunity Cost and the PPCThe production possibilities curve illustrated above has two significant characteristics:1.The PPC slopes downward and to the right. This represents the OPPORTUNITY COST of increasing the output of one good at the expense of the second good. An increase in food production requires a reduction in the production of clothing. The slope of the PPC is negative at all points on the curve. Opportunity cost is measured by the slope of the PPC (the change in along y-axis divided by the change along the x-axis). As production of food increases, production of clothing declines and vice versa.2.The PPC is "bowed outward" (concave) from the origin. This represents INCREASING OPPORTUNITY COST. For example, increasing food production from 0 units to 10 units requires only a small reduction in clothing production. A further increase from 10 to 20 requires a larger sacrifice. Finally increasing from 40 to 50 requires the largest sacrifice. The opportunity cost of producing more food increases as we move to the right in the graph. The slope of the PPC becomes more negative as we move from left to right on the curve.INCREASING OPPORTUNITY COST - As more scarce resources are used to increase production of one good or service, production of another good or service falls by larger and larger amounts.Why are there increasing opportunity costs? To produce more food, resources employed in clothing production must be transferred to food production. The first resources transferred from clothing to food production will likely be those that are best suited for food production. For example, the most fertile land is first transferred from raising sheep to growing food. As more resources are transferred those resources are progressively less well suited to food production. Increasing opportunity costs is a reflection of the specialized characteristics of resources. Resources are not perfectly adaptable to alternative uses.

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