Lesson preview · Production Possibilities Curve
Opportunity Cost on the PPC
~5 min · Free to read
You can read opportunity cost right off the PPC. When you move from one point on the curve to another, the drop in one good is the opportunity cost of the increase in the other. If producing 10 more phones means sacrificing 20 wheat, the opportunity cost of one phone is 2 wheat.
Tip
Reading opportunity cost
Opportunity cost of good X = (amount of Y given up) ÷ (amount of X gained). Walk along the curve and do the subtraction.
Opportunity cost between two points on the PPC — the slope (absolute value).
PPCs come in two shapes. A straight-line (linear) PPC means constant opportunity cost — every extra phone costs the same number of wheat units. A bowed-out (concave) PPC means increasing opportunity cost — each extra phone costs more and more wheat.
Key Term
Increasing Opportunity Cost
As you shift resources from producing one good to another, each additional unit of the new good costs more of the old good. Why? Because not all resources are equally good at making every product.
The bow-shape happens because resources are specialized. Farmers are good at farming, not factory work. When you first move workers from wheat to phones, you move the ones who are bad at farming and decent at tech — small loss, big gain. Eventually you’re forced to move the best farmers, which costs a lot of wheat for not many phones. Hence the increasing cost.
Check yourself · no marks
A PPC moves from producing 80 wheat + 20 phones to producing 60 wheat + 35 phones. What’s the opportunity cost of each extra phone over this range?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Worked Example
A country’s PPC has these points:
• A: 100 wheat, 0 phones • B: 90 wheat, 10 phones • C: 70 wheat, 20 phones • D: 40 wheat, 30 phones
Calculate the opportunity cost per phone over each segment. Is opportunity cost constant or increasing?
Practice · 1 / 4
On a PPC, moving from 50 cars + 100 bikes to 40 cars + 130 bikes, what is the opportunity cost per bike?
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