What this lesson teaches
I can explain the trade-off and the opportunity cost (the next best thing given up) in a choice.
Syllabus 9570, 1.1.1(c). Scarcity, choice and resource allocation: When choices are made, trade-offs and opportunity costs are incurred
I can use a production possibility curve to show scarcity, opportunity cost, efficiency, unemployment and growth.
Syllabus 9570, 1.1.1(e). Scarcity, choice and resource allocation: Production Possibility Curve (PPC) can be used to illustrate scarcity, choice, opportunity cost, productive efficiency, full employment, unemployment or under-utilisation of economic resources and changes in the productive capacity of an economy
Make a guess
A country moves workers from farming into making machines, one batch at a time. What happens to the number of crops lost for each extra machine?
- It falls, because workers get used to making machines.
- It rises, because the later workers are better at farming.
- It stays the same, because each worker is moved the same way.
Show the answer
It rises, because the later workers are better at farming.
The first workers moved are the ones best suited to machines. Later, skilled farmers are moved, so each extra machine costs more crops.
Moving along a PPC shows the opportunity cost, and a bowed-out PPC shows it rising.
When the economy is on its PPC, producing more of one good means producing less of the other. The amount given up is the opportunity cost.
On a bowed-out PPC, each extra batch of capital goods costs more consumer goods than the last.
This is because resources are specialised. The first workers moved into making machines are the ones best suited to it. Later, the economy has to move workers who are much better at making consumer goods, so more consumer goods are lost.
A straight-line PPC would mean a constant opportunity cost, because resources are equally good at both.
- Moving along
- Shows opportunity cost.
- Bowed out
- Opportunity cost rises, because resources are specialised.
| Point | Repairs | Benches | Benches given up per extra repair |
|---|---|---|---|
| A | 10 | 45 | - |
| B | 20 | 35 | 1 |
| C | 30 | 20 | 1.5 |
Worked example: More repairs, fewer benches
Suppose a group of workshops can make 10 repairs and 45 benches a week (A), 20 repairs and 35 benches (B), or 30 repairs and 20 benches (C).
- A to B: 10 more repairs cost 10 benches, 1 bench per repair.
- B to C: 10 more repairs cost 15 benches, 1.5 benches per repair.
- The opportunity cost of repairs rises because the workers moved later are better at making benches.
Watch out for this
Opportunity cost on a PPC is the total amount of the other good produced.
It is the amount of the other good given up as you move along the curve, not the total produced.
Check your understanding
On a PPC, moving from 20 to 30 capital goods cuts consumer goods from 80 to 65. What is the opportunity cost of the extra 10 capital goods?
- 10 capital goods.
- 65 consumer goods.
- 15 consumer goods.
Show the answer
15 consumer goods.
Right. 80 - 65 = 15 consumer goods given up.