How to view Opportunity Cost PPF How to view Opportunity Cost

Key Takeaways A production possibilities curve shows the combinations of two goods an economy is capable of producing. The downward slope of the production possibilities curve is an implication of scarcity.

Comparative Advantage The bowed-out shape of the production possibilities curve results from allocating resources based on comparative advantage. (A person has a comparative advantage at producing something if he can produce it at lower cost than anyone else.)

Increasing Opportunity Cost Such an allocation implies that the law of increasing opportunity cost will hold. Law states that once all factors of production (land, labor, capital) are at maximum output and efficiency, producing more will cost more than average. As production increases, the opportunity cost does as well.

Example Rabbits Berries 5 0 4 100 3 180 2 240 1 280 0 300 5 0 4 100 3 180 2 240 1 280 0 300 As you try to catch more rabbits, the energy and efficiency of doing so is greater, therefore the amount of berries to be found decreases at a greater rate. The opportunity cost of each incremental rabbit increases.

Failure of PPF An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. Specialization means that an economy is producing the goods and services in which it has a comparative advantage.