As well as illustrating opportunity cost, this tool helpfully highlights the trade-offs between different resources. Want to keep learning? This content is taken from Coventry University online course,.
You can do this however you like — you might like to use software you have access to, or draw it by hand and take a photo. Part 1: Produce a PPF graph for the trade-off between transport and other goods, like the one above, and annotate key parts of it with explanations of what it represents. For example:. What effect does this have on the PPF graph?
Draw these changes in, and add explanations of how it affects the points you labelled. For help using Padlet, see below. You will then be able to either upload what you have discovered or link to a URL that is available in your browser address bar. For more information on how to post, please visit the Padlet website. If you have trouble uploading your visual representation, you may try to use another wall or create a link of what you have created, which you can post in the comments area below, along with your comments.
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Whether you follow the links and submit your personal information or not, your course progress will in no way be affected. This content is taken from Coventry University online course. Such movement is considered an economic growth. 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. That is the tradeoff society faces. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? The opportunity cost would be the healthcare society has to give up. There are two major differences between a budget constraint and a production possibilities frontier.
The first is the fact that the budget constraint is a straight line. This is because its slope is given by the relative prices of the two goods. In contrast, the PPF has a curved shape because of the law of the diminishing returns. The second is the absence of specific numbers on the axes of the PPF. There are no specific numbers because we do not know the exact amount of resources this imaginary economy has, nor do we know how many resources it takes to produce healthcare and how many resources it takes to produce education.
If this were a real world example, that data would be available. An additional reason for the lack of numbers is that there is no single way to measure levels of education and healthcare. However, when you think of improvements in education, you can think of accomplishments like more years of school completed, fewer high-school dropouts, and higher scores on standardized tests.
When you think of improvements in healthcare, you can think of longer life expectancies, lower levels of infant mortality, and fewer outbreaks of disease. Whether or not we have specific numbers, conceptually we can measure the opportunity cost of additional education as society moves from point B to point C on the PPF.
The additional education is measured by the horizontal distance between B and C. The foregone healthcare is given by the vertical distance between B and C. This is the opportunity cost of the additional education.
The budget constraints presented earlier in this chapter, showing individual choices about what quantities of goods to consume, were all straight lines. The reason for these straight lines was that the slope of the budget constraint was determined by relative prices of the two goods in the consumption budget constraint.
However, the production possibilities frontier for healthcare and education was drawn as a curved line. Why does the PPF have a different shape? At point A, all available resources are devoted to healthcare and none are left for education. This situation would be extreme and even ridiculous.
For example, children are seeing a doctor every day, whether they are sick or not, but not attending school. People are having cosmetic surgery on every part of their bodies, but no high school or college education exists. Now imagine that some of these resources are diverted from healthcare to education, so that the economy is at point B instead of point A. Diverting some resources away from A to B causes relatively little reduction in health because the last few marginal dollars going into healthcare services are not producing much additional gain in health.
However, putting those marginal dollars into education, which is completely without resources at point A, can produce relatively large gains. For this reason, the shape of the PPF from A to B is relatively flat, representing a relatively small drop-off in health and a relatively large gain in education.
Now consider the other end, at the lower right, of the production possibilities frontier. Imagine that society starts at choice D, which is devoting nearly all resources to education and very few to healthcare, and moves to point F, which is devoting all spending to education and none to healthcare. For the sake of concreteness, you can imagine that in the movement from D to F, the last few doctors must become high school science teachers, the last few nurses must become school librarians rather than dispensers of vaccinations, and the last few emergency rooms are turned into kindergartens.
The gains to education from adding these last few resources to education are very small. However, the opportunity cost lost to health will be fairly large, and thus the slope of the PPF between D and F is steep, showing a large drop in health for only a small gain in education. The lesson is not that society is likely to make an extreme choice like devoting no resources to education at point A or no resources to health at point F.
Instead, the lesson is that the gains from committing additional marginal resources to education depend on how much is already being spent.
If on the one hand, very few resources are currently committed to education, then an increase in resources used can bring relatively large gains.
On the other hand, if a large number of resources are already committed to education, then committing additional resources will bring relatively smaller gains. This pattern is common enough that it has been given a name: the law of diminishing returns , which holds that as additional increments of resources are added to a certain purpose, the marginal benefit from those additional increments will decline.
When government spends a certain amount more on reducing crime, for example, the original gains in reducing crime could be relatively large. But additional increases typically cause relatively smaller reductions in crime, and paying for enough police and security to reduce crime to nothing at all would be tremendously expensive. The curvature of the production possibilities frontier shows that as additional resources are added to education, moving from left to right along the horizontal axis, the original gains are fairly large, but gradually diminish.
Similarly, as additional resources are added to healthcare, moving from bottom to top on the vertical axis, the original gains are fairly large, but again gradually diminish. In this way, the law of diminishing returns produces the outward-bending shape of the production possibilities frontier. The study of economics does not presume to tell a society what choice it should make along its production possibilities frontier. In a market-oriented economy with a democratic government, the choice will involve a mixture of decisions by individuals, firms, and government.
However, economics can point out that some choices are unambiguously better than others. This observation is based on the concept of efficiency.
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