Course: AP®︎/College Macroeconomics > Unit 1Lesson 2: Opportunity cost and the Production Possibilities Curve
- Production possibilities curve
- Opportunity cost
- Increasing opportunity cost
- PPCs for increasing, decreasing and constant opportunity cost
- Production Possibilities Curve as a model of a country's economy
- Lesson summary: Opportunity cost and the PPC
- Opportunity cost and the PPC
Increasing opportunity cost
The concept of opportunity cost in economics can change depending on the scenario. For example, there might be a trade-off between hunting for rabbits or gathering berries. As one pursues more rabbits, the opportunity cost (in terms of berries given up) increases. This phenomenon is illustrated graphically with a bow-shaped curve. Created by Sal Khan.
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- What types of events could cause a shift in the productions possibilities frontier?(17 votes)
- New Technology which increases the productivity of existing resources
New resources: more Labor, more Land(eg. rabbit population increases), investing resources to produce Capital (eg. making more bows to hunt rabbits)(15 votes)
- Is increasing opportunity costs the same as diminishing returns?(16 votes)
- They describe the same situation but are different statements, in the same way as asking are 'a is less than b' and 'b is greater than a' the same.
The opportunity cost of something measures the price, whereas the return is measuring how much your payment of inputs is worth, so if the ppf is showing that rabbits get more expensive in terms of lost berries the more rabbits you have, that's equivalently a diminishing marginal return on the input (potential berries given up) and an increased opportunity cost on the output (expensive rabbits). Rabbits go up in price = giving up berries gets you less and less per berry given up.
Opportunity costs are always about something that didn't happen, returns are the production from an input, so you can see how a ppf is better suited to describing OC's than returns, because defining the 'input' to getting rabbits as 'not getting berries' is awkward.
It might be easier to think of time as an input, decreasing your marginal return on time is more natural than a decreasing return on 'not having berries', but notice nothing in this example says the 5th rabbit takes more time than the 4th, it just gives up more berries. Maybe all berries are equally easy to pick but the rabbits get increasingly crafty. OR maybe all rabbits are equally simple to catch but the berry bushes grow increasingly far from your home. The curved ppf could represent some very different scenarios.(13 votes)
- So, what if I'm hunting the easy, not witty rabbits, and ALSO gathering the easy berries?(5 votes)
- That would be the point on the graph in purple labeled inefficient, because you are not using all your time to pick/hunt. You are just getting a few, and then you would have time to spare.(10 votes)
- I understand the video, however I had a question about whether this contradicts economies of scale. For example: how Apple probably spends $100 to manufacture an ipad, but if I was to start a new company, I would probably spend $1,000 to create my first ipad.(5 votes)
- This doesn't contradict economies of scale. Economies of scale occurs when your sales increase but your fixed costs remain constant. This means that your total cost to build 1 unit goes down because the fixed costs are allocated over a greater amount of units sold.(6 votes)
- How can we say that first we shift best resources and after that less effective ones,as we take assumption that ALL given resources are efficiently and effectively used?(5 votes)
- Our skill, our technology or anything else doesn't change. We work as effeciently as we can all the time. But it simply takes more time to find the more hidden berries, or hunt those faster rabbits.(5 votes)
- Can a PPF be illustrated by a straight line?(4 votes)
- The PPF can be represented by a straight line when, for example, you are comparing two very similar products. See the link above provided by Carol Bruce.(0 votes)
- why does it only cost 20 berries to go from 0 to 1 rabbits, and 100 to go from 4 to 5?(2 votes)
- Yeah pltc. has a good point, the first rabbit may be easy to get but the less rabbits there are in this small environment the longer and more difficult it is to find and catch the next rabbit therefore allocating less berries per rabbit. Also, same thing with berries, in time, there will be less berries to find and therefore it takes more of your time to search for them and pick them.(1 vote)
- Does PPF show that opportunity cost increases for ALL goods produced in a economy?(3 votes)
- No. PPF is just a useful tool for thinking about the concepts of marginal and opportunity costs. In the PPF, we assume that there are only two goods that are being produced by an economy. In reality, of course, there are many more goods, but in theory there is a maximum of all of those goods that an economy could produce and to create more of one product, you are always going to give up some of another.(3 votes)
- Am I the only one who feels sorry for the dumb, friendly rabbit? Actually, I'm studying some world history, and was wondering how opportunity cost and these other aspects of economics might effect domestication. For instance, you would think that if a friendly goat wandered into the camp of a goat-eating tribe he'd be devoured, bye-bye domestication. Do you know of any economic studies of the ancient world that address this issue?(2 votes)
- Opportunity cost is exactly the reason why the goat-eating tribe would not eat the friendly goat! Once a tribe discovers that they can turn two goats into many more goats, the opportunity cost of eating that goat right now would be foregoing all the future milk and meat that they could produce through domestication. Just like a farmer doesn't eat his seeds, the goat-eating tribe wouldn't eat the goat. (Unless, perhaps, they were starving and might not live to see these future benefits).
I'm not sure that it directly answers your question, but you might be interested in the book The Evolution of Human Societies by Allen W. Johnson and Timothy Earle. It combines anthropology and economics.(3 votes)
- How could I find an equation for the possibility production frontier? Then it could be differentiated to find the opportunity cost I think.(10 votes)
- It's really a maths rather than economics question. How do you find equation of non-linear lines.(0 votes)
What I want to do in this video is think about how the opportunity cost can change as we move from scenario to scenario. And this is going to be particular to this example, but it's a phenomenon that you will see in many economic scenarios. So let's say we're starting off in Scenario F. We are vegetarians. We are only getting berries. We are not spending any time going after rabbits. But now we're starting to, I guess, crave protein. And we say, well, what is going to be the opportunity cost if I go for that extra rabbit? If I go for that extra rabbit, then what's going to happen? Well, I'm going to have to stay on my production possibilities frontier. And so I'm going to move to Scenario E. So if I go after that one extra rabbit, I'm going to give up 20 berries. So my opportunity cost in Scenario F, sitting in Scenario F, of going after that 1 rabbit is 20 berries. Now let's keep going. What happens if I'm in Scenario E? I'm already, on average, eating 1 rabbit or finding 1 rabbit a day. And I want to go to 2 rabbits a day. What am I going to give up? Let me do that in that same color. What will I give up? Well, now I am going to give up 40 berries. This is interesting. Now let's say we're in Scenario D and we want even more rabbits. We're really starting to become carnivores now. What am I going to give up? Well, I'm going to give up 60 berries. If I'm able to get 3 rabbits, every day, on average then I'm only going to get 180 berries now instead of 240. And let's just keep going. So if I want yet another rabbit every day, then I'm going to have to give up 80 berries. And then finally, just to feel some sense of completion, if I become a complete carnivore and if I want to get on average, 5 rabbits a day, I'm going to have to give up another 100 berries and go to not having any berries at all. And so you might see something interesting. The more squirrels-- sorry, not squirrels although I guess they're similar-- the more rabbits that I'm going after, every time I try to go after another incremental rabbit I'm giving up more and more berries. My opportunity cost is increasing. And so this phenomenon, it's not always the case but it's the case in this example, increasing opportunity cost. Increasing opportunity cost as we increase the number of rabbits we're going after. And you could do it the other way. You could say, OK, as we increase-- especially if you did it on a unit basis, if you said every incremental berry or every incremental 100 berries we're going after, but the numbers aren't as easy right over here-- you'll actually see something going the other way. But the question, an interesting question is, OK, Sal. You set up the numbers like this earlier two videos ago. But why would this make sense? Why is this idea of increasing opportunity cost showing up in a lot of different economic, and you can call this an economic model. We have simplified our economic reality, the choices that we have to make, down to two variables the number of rabbits we have to go after or the number of berries. But why does this show up in economic models? And just to be clear, it does not show up in all of them. But to think about our example, as a hunter gatherer, we started here in Scenario F. In Scenario F, we've decided to not pursue any rabbits. Even the slower, not so quick witted rabbit who maybe likes to hang out with you, next to you, and it likes to play with your spears or your bow and arrow-- you are not even going after that rabbit. Instead you are choosing to spend all of your time on the berries. And not only are you getting, literally, the low hanging fruit, the easy berries, you're getting the berries that are further up the bush, the berries that you have to get cut by thorns to get, the berries that you have to climb trees to get. So you're getting even hard to get berries and you're not going after even easy to get rabbits. But now all of a sudden if you say, well, you know, that rabbit who's been hanging out with me, he's been kind of asking for it. And so that was very easy to get. It didn't take much time on a given day to get those really easy rabbits who like to hang out with you. You're not give a lot in terms of berries. One, it didn't take you much time to get those, literally, those slow and maybe less quick witted rabbits. And you're giving up, in that same amount of time, the very hard to get berries. So you're only going to give up about 20 of them. Now if you want to 2 rabbits a day, not only are you going to get the slowest of the rabbits, the ones that aren't afraid of humans, now you're going to have go get the slightly faster rabbit-- the slightly faster rabbit, who wants to die a little bit less and is maybe a little bit sharper. And you're now not giving up the berries that are way up in the tree and that are protected by thorns. You're giving up berries that are closer down the trees. So this is going to take you a little bit more time to do than this right over here. And in that little bit more time, you're also giving up berries that were easier to get. And so this phenomenon is going to happen all the way until in this scenario we're trying to get 5 rabbits a day. You are literally going after the quickest and the smartest rabbits. But you insist on going for them and in your pursuit of these quick, fast rabbits you're even ignoring berries. You're literally, like, stepping on berries. You're not eating the berries that are right next to you because you're so obsessed with eating rabbits. So hopefully that gives you a sense of why increasing opportunity cost does show up. And when you graphically show it in terms of a production possibilities frontier, it shows up in this bow-shaped curve. And you can see it, because as we go from this point to this point, you see that as we increase one the slope, the negative slope, is increasing. Or another way to think about, in Scenario F, the slope is roughly like this. And I encourage you to review the algebra playlist if the idea of slope is confusing to you. But at F, the slope is like that. I'm drawing the slope of the tangent line right over here. At E it gets even steeper. You're giving up even more of the berries per unit rabbit. And now in D you're giving up even more. And then you're giving up even more. And so whenever you see a bow-shaped curve like this, so a curve that literally looks like this, this shows that you have increasing opportunity costs. As you increase more and more units, you're going to have to give up more and more of the alternative.