Chapter 2 – Additional Discussion on the Bow-Shaped PPF

A Bow-Shaped PPF shows changing opportunity cost Mountain Bikes Beer -Recall that the slope of the PPF represents the opportunity cost -If the PPF is not straight, we are not able to calculate the slope with rise/run -The slope of a curved line is different at every point

Changing Opportunity Cost -With the production of each additional bike, we must give up more beer than as compared to the previous bike -This is shown by the increasing height of the boxes as we move along the points -Moving from point A to B costs very little beer -Moving from point B to C gives us the same number of bikes as the last move, but costs more beer -Repeat for C to D and D to E Mountain Bikes Beer A B C D E

As we move closer and closer to producing all mountain bikes and no beer, the cost of the next mountain bike is greater than the last one, in terms of beer This is an example of the concept of increasing marginal cost, the cost of the next unit is greater than the last one We will examine this concept in more detail in the chapter on Costs of Production

Example Question What is the opportunity cost of moving from B to C? -10 units of beer What is the opportunity cost of moving from C to D? -20 units of beer As we make more bikes, what happens to the opportunity cost of bikes? -it increases What is the opportunity cost of moving from F to D? -Nothing Why? -No beer is given up; F is inside the PPF Mountain Bikes Beer A B C D E F