In today’s society, economic decisions made involve the concept of scarcity. There are “opportunity costs” associated with any choice that you make. In order for an economy to produce more of one type of product, it will be forced to sacrifice units of production of another product. The shifting of resources from the production of one good to another involves increasing sacrifices of the first good in order to generate an equal increase of the second good. This is known as the “law of increasing opportunity costs.” The economic rational for the law of increasing opportunity costs is that economic resources are not completely adaptable to alternative uses. The opportunity cost of producing a product tends to increase as more of it is produced because resources less suitable to its production must be employed.
Prices are a measure of opportunity cost because they provide information about the value of one product in relation to another. The shape of the Productions Possibility Frontier, (PPF), illustrates the principle of increasing opportunity costs (Graph 3).
As more of one product is produced, increasingly larger amounts of the other product must be given up. In Graph 3, some factors of production are suited for producing both Product A and Product B, but as the production of one of the other brands increases, resources better suited to production of the other must be diverted. Producers of product A are not necessarily efficient producers of product B and just the opposite, so the opportunity cost increases as one moves toward either extreme on the curve of the production possibility frontier.
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If two products are very similar to one another, the production possibility frontier may be D’Orlando 2 shaped more like a straight line (Graph 2).
As an example, let’s say that two brands of wine are produced, Brand A and Brand B. These two brands of wine use the same grapes and the production process is the same. The only thing that is different is the name on the label. The same factors of production can produce either brand equally efficiently. If an increase in production of Brand B goes from 0 to 3 bottles, the production of Brand A must be decreased by 3 bottles.
In this case, the two products are almost identical and can be produced equally efficiently using the same resources. The opportunity cost of producing one over the other remain constant between the two extremes of the production possibilities. The difference in increasing constant opportunity costs is that constant opportunity costs change at the same rate of increase or decrease, because the products are similar. Increasing opportunity costs change at different rates of increase or decrease because Product A’s producer is not efficient in producing Product B and visa versa. The Production Possibilities Frontier is all the combinations of two goods that can or can’t be produced. The PPF helps to explain and show how opportunity costs work.
The law of increasing opportunity cost explains why the Production Possibility Curve, (PPC) is concave from the origin. A “bowed out” curve shows that resources in production are not equally efficient in producing every good. This slope of the PPC is a graphical way of showing that to produce more of one product we must do with less of another. “Opportunity cost” is that cost or item that you must give up or do with less of that item. Points outside the PPF are not common but can be D’Orlando 3 achieved with specialization and international trade. One of the things the production possibility curve shows us is product efficiency.
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Along the curve we see the maximum output that can be obtained given the available inputs. Points inside the curve are inefficient, since the resources could be used to create more output. This helps explain why some countries want to take over other countries. If you could increase your amount of resources by conquering a neighboring country, your production possibility curve would shift to the right, showing that you can now produce more goods than ever before. In Graph 1, you will see a Production Possibilities Frontier for a capital good and a consumer good. If, along the PPF curve, you move from point A to point B, you will be producing fewer capital goods and more consumer goods.
If the economy is producing at the point of X, you are not producing efficiently and your resources are not fully employed. If at point X the economy moves to point B, more capital goods and more consumer goods will be produced and the economy would then be producing efficiently. If the economy is to produce at point Z, there must be economic growth. This can happen because of an increased resource supply or a technological improvement.
Looking at Graph 4 a, you will see an example of how the Production Possibility Frontier can shift outward. Economic growth is one of the reasons why a PPF might shift outward. Some of the factors that influence the growth have to do with increased resources, which can be any thing that goes into the production of a product. There could be an increase in some type of natural resource or there could be an increase in the skill D’Orlando 4 of the average worker. There can also be a technological advancement, which can be a general improvement to the production of a product or a whole new more efficient way to produce a product. When these improvements happen, it causes the PPF to shift outward to a new level production greater than before.
There can also be an inward shift of the PPF, which is shown in Graph 4 a. This can be caused by the decrease of resources that affect production. Examples of this would be a decrease in natural resources or a decline in the birth rate or a depletion of available energy resources. Another cause would be going to war with another nation and suffering a major defeat. This would shift the PPF inward. When this happens, a country or company will have to produces less than it could before because of the inward shift of the PPF.
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These effects can shift a country’s PPF out which raises the production levels of the country or it can shift in and a country can lose some levels of production. The economy in today’s society is a highly technical system which depends on many, many factors. A change in one of these factors can cause a major shift in the balance of the other factors and can have a huge impact on that economy. It is a complex and delicate system that is constantly in flux.