Production Possibility Frontier (PPF or PPC)

PPF is the curve that shows the best (maximum) combinations of two outputs that an economy can produce given three assumptions: 1) Technology is fixed; 2) Resources are fixed; and 3) Resources are used at their fullest. Hence, all points in PPF are efficient and a movement between one efficient point to another, means that more of one product is produced only if less of the other is produced. This creates a trade-off due to scarcity of resources.

All points inside PPF are inefficient points. These points are attainable (e.g., point U), but they are not using the resources at the fullest. At point U, if technology or resources are used at full capacity, the economy could be at point B or C, meaning more would be produced.

All points outside PPF are unattainable (e.g., point Z). Point Z could be attained only if technology or/and resources increase and the economy shifts its PPF to the right. Such movement is considered an economic growth .

Law of Increasing Opportunity Cost

Moving from point A to B, B to C, and C to D, shows a trade-off between military goods and consumer goods. The only way this economy can produce more consumer goods is by producing less military goods, or in other words giving up some production of military goods. So, moving from A to B, the economy is producing 40 consumer goods and is giving up 20 military goods. So, the opportunity cost of these first 40 consumer goods is 20 military goods.

Moving from B to C, the economy is producing another 40 consumer goods (80 in total) and is giving up an additional 60 military goods. So, the opportunity cost of the second batch of 40 consumer goods is 60 military goods. The opportunity cost of producing consumer goods is increasing as we produce more of it. This increasing opportunity cost is a similar concept of diminishing returns.

Can you try to explain why increasing opportunity cost occurs?