Why does this happen? Well, some resources are better suited for some tasks than others. If Econ Isle's production moved in the opposite direction, from all gadgets to all widgets, the law would still hold: As you increase the production of one good, the opportunity cost to produce the additional good increases. In other words, the more gadgets Econ Isle decides to produce, the greater its opportunity cost in terms of widgets. If Econ Isle transitions from widget production to gadget production, it must give up an increasing number of widgets to produce the same number of gadgets. As the law says, as you increase the production of one good, the opportunity cost to produce the additional good increases. In reality, however, opportunity cost doesn't remain constant. This straight frontier line indicates a constant opportunity cost. So along the straight line, each time Econ Isle increases widget production by 2, it loses the opportunity to produce 4 gadgets. This point shows widget production increased by 2, and this by 2 more, and this by 2 more, indicating all widgets and no gadgets. It shows that Econ Isle can produce a maximum of 12 gadgets and 6 widgets or any other combination along the line.Īt this point, Econ Isle can produce 12 gadgets and 0 widgets. So let's compare straight and curved frontier lines to better understand what is more likely to happen when production changes. Lesson 5: The law of increasing opportunity cost: As you increase the production of one good, the opportunity cost to produce the additional good will increase.įirst, remember that opportunity cost is the value of the next-best alternative when a decision is made it's what is given up. For this reason, the frontier is usually drawn as a curved line that is concave to the origin. This curved line illustrates our fifth and final lesson. However, a straight line doesn't best reflect how the real economy uses resources to produce goods. Up to this point we've graphed the PPF as a straight line. Our final lesson focuses on the shape of the frontier line. It has not been edited for readability, and there may be slight differences between the text and the video. Segment 2: The PPF Illustrates Underemployment, Economic Expansion, and Economic Growthīelow is the full transcript of this video presentation. Segment 1: The PPF Illustrates Scarcity and Opportunity Cost.
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