Why does opportunity cost increase along ppf

This represents a decrease by cars relative to the current production. The opportunity cost of additional 20, gallons of milk is 1, cars.

In terms of this production possibility frontier, this means that this economy can now produce twice as much milk at each level of car output. With the economy currently producing cars, Jerry claims that the development of BGH allows the economy to produce more milk and more cars. Do you agree? Explain carefully, using an appropriate diagram to illustrate your answer. Yes, Jerry is right. See graph. It is easy to see that, being at point A corresponding to cars and 30, gallons of milk , the economy can move up to point B more milk , to the right to point C more cars , or have more milk and more cars at the same time point D.

A team consisting of three people is working on a big project, which involves manual entry of data in a computer, with subsequent processing of these data and making a poster presentation. Naturally, each member of the team has different abilities in performing either task.

Adam can make 1 poster or data entries in a day. Hard-working Becci can make 2 posters or data entries in a day. Artistic Cliff can make 3 posters or entries in a day. Originally, the entire team each of them having their own personal computer starts with entering data.

Being at point X means that the country's resources are not being used efficiently or, more specifically, that the country is not producing enough cotton or wine, given the potential of its resources.

On the other hand, point Y, as we mentioned above, represents an output level that is currently unattainable by this economy. If there were an improvement in technology while the level of land, labor, and capital remained the same, the time required to pick cotton and grapes would be reduced.

The output would increase, and the PPF would be pushed outwards. A new curve, represented in the figure below on which Y would fall, would show the new efficient allocation of resources. When the PPF shifts outwards, it implies growth in an economy. When it shifts inwards, it indicates that the economy is shrinking due to a failure in its allocation of resources and optimal production capability.

A shrinking economy could be a result of a decrease in supplies or a deficiency in technology. An economy can only be produced on the PPF curve in theory. In reality, economies constantly struggle to reach an optimal production capacity. And because scarcity forces an economy to forgo some choice in favor of others, the slope of the PPF will always be negative.

That is, if the production of product A increases then the production of product B will have to decrease. The Pareto Efficiency states that any point within the PPF curve is inefficient because the total output of commodities is below the output capacity.

Conversely, any point outside the PPF curve is impossible because it represents a mix of commodities that will require more resources to produce than are currently obtainable. Therefore, in situations with limited resources, only the efficient commodity mixes are those lying along the PPF curve, with one commodity on the X-axis the other on the Y-axis.

Consider a hypothetical world that has only two countries Country A and Country B and only two products cars and cotton. Suppose that Country A has very little fertile land and an abundance of steel. Country B has an abundance of fertile land but very little steel. If Country A were to try to produce both cars and cotton, it would need to split its resources and put a great deal of effort into irrigating its land to grow cotton.

That would mean it can produce fewer cars, which it is much more capable of doing. The opportunity cost of producing both cars and cotton is high for Country A.

Similarly, for Country B, the opportunity cost of producing both products is high because of the effort required to produce cars given its lack of steel. An economy may be able to produce for itself all of the goods and services it needs to function using the PPF as a guide. However, this may actually lead to an overall inefficient allocation of resources and hinder future growth when the benefits of trade are considered.

Through specialization , a country can concentrate on the production of just a few things that it can do best, rather than trying to do everything on its own. Each country in our example can produce one of these products more efficiently at a lower cost than the other. We can say that Country A has a comparative advantage over Country B in the production of cars, and Country B has a comparative advantage over Country A in the production of cotton.

Or, both countries could decide to specialize in producing the goods for which they have a comparative advantage. Each can trade its specialized product to the other and both countries will be able to enjoy both products at a lower cost.

Quality will improve, too, since each country is making what it makes best. Determining how countries exchange goods produced by comparative advantage "the best for the best" is the backbone of international trade theory. This method of exchange via trade is considered an optimal allocation of resources. It means that national economies, in theory, will no longer be lacking anything that they need. Like opportunity cost, specialization and comparative advantage also apply to the way in which individuals interact within an economy.

At least in modern times, few people try to produce everything they consume. Sometimes a country or an individual can produce more than another country, even though countries both have the same amount of inputs.

For example, Country A may have a technological advantage that, with the same amount of inputs good land, steel, labor , enables the country to easily manufacture more of both cars and cotton than Country B.

A country that can produce more of both goods is said to have an absolute advantage. Better access to natural resources can give a country an absolute advantage, as can higher levels of education, skilled labor, and overall technological advancement. It is not possible, however, for a country to have an absolute advantage in everything that must be produced.

The curved shape reflects the law of diminishing returns. This law states that there comes a point where an added production factor has less of an impact. For example, adding additional resources toward the production process may initially result in fairly large gains. However, these gains gradually lessen, thus producing the PPF's outward curved shape.

A straight line occurs if the opportunity cost remains constant. Despite this, Pareto efficiency is still an extremely useful concept. A point on a PPF is, by definition, productively efficient in that all of the economies resources are being fully employed, and their is no waste or unemployment. For it to be allocatively efficient it must satisfy consumer demand and consumer preferences.

As will be seen later, allocative efficiency is more formally expressed as a level of output where the marginal benefit to the consumer or the last unit consumed equals the marginal cost of supply of that unit. Clearly, not all combinations will satisfy this condition. In the example shown, a society may produce only meat or vegetables, but its population prefers a varied diet. Opportunity cost can be thought of in terms of how decisions to increase the production of an extra, marginal, unit of one good leads to a decrease in the production of another good.

According to economic theory, successive increases in the production of one good will lead to an increasing sacrifice in terms of a reduction in the other good. For example, as an economy tries to increase the production of good X , such as cameras, it must sacrifice more of the other good, Y, such as mobile phones. This explains why the PPF is concave to the origin, meaning its is bowed outwards. For example, if an economy initially produces at A, with 8m phones and 10m cameras to 20m , and then increases output of cameras by 10m, it must sacrifice 1m phones, and it moves to point B.

If it now wishes to increase output of cameras by a further 10m to 30m it must sacrifice 2m phones, rather than 1m, and it moves to point C; hence, opportunity cost increases the more a good is produced. The gradient of the PPF gets steeper as more cameras are produced, indicating a greater sacrifice in terms of mobile phones foregone.

Economic decisions are taken in a marginal way, which means that decisions to produce, or consume, are made one at a time. For example, a typical consumer does not decide to drink four cans of cola at the beginning of each day, rather they make four individual decisions, one at a time.

Similarly, a baker does not decide to produce 5, loaves of bread in a year, but decides each day or week what to produce. Economic decisions are marginal because conditions are constantly changing, and consumers and producers would be highly irrational if they did not consider this. Hence, each production or consumption decision is assumed to be made one at a time so that changing conditions can be assessed.

Go to: Economic growth. Stagflation is a combination of high inflation, high unemployment, and stagnant economic growth.