Opportunity Costs and The Production Possibilities Curve by Omkar Abhyankar

 In the last article, we looked at the Production Possibilities Curve (PPC) and learned how to interpret it. In this article, we will dive deeper into looking at what the shape of the curve reveals. A PPC curve can actually take on three different general forms and each tells us something different about the opportunity costs of goods. 

Let’s take a look at the first shape which the Production Possibilities Curve can take:

We see a graph of a producer producing Pillows and Blankets. Suppose this producer utilizes all of its resources in their production. Therefore, points representing production levels for this producer will necessarily lie on the PPC. Let us take note of the shape of this particular curve. We see that although it is decreasing, the slope of the curve increases in magnitude from left to right, giving it a “bowed out” convex shape. Recall that every point on this graph represents a unique set of production levels, and for each such set of production levels, goods have unique opportunity costs. Using this graph, let’s observe how the opportunity cost for producing an extra blanket changes as we consider different points on the PPC moving from left to right. Let us begin at Point A, where there are 100 pillows and 0 blankets being produced. Keeping in mind that this producer utilizes all of its resources, if the producer now wants to change the production levels to produce an extra blanket, the point on the graph representing these levels will change to Point B, the point on the PPC where 1 blanket is being produced. But at Point B, the producer can only then produce 90 pillows, as opposed to the 100 it could produce at Point A. Therefore, the opportunity cost of producing that extra blanket was 10 pillows. Now suppose the producer wants to produce yet another blanket, for a total of 2. Then the point on the PPC representing the new production levels would be Point C. But here, the producer can only produce 75 pillows, 15 less than it could at Point B. This means that by producing another blanket, the producer misses out on the opportunity of producing 15 pillows and therefore now an extra blanket has the opportunity cost of 15 pillows. If the producer again wants to produce another blanket for a total of 3, the production levels would have to move to Point D, where only 48 pillows may be produced. Now, producing an extra blanket caused the producer to miss the opportunity to produce 27 pillows which were available at Point C, and therefore in this transition, the opportunity cost of producing that extra blanket is 27 pillows. Notice how for every additional good on the horizontal axis (blanket) being produced, the opportunity cost increases going from 10 to 15 to 27. This is why a “bowed out” PPC like this one is said to have an increasing opportunity cost.

Now let's look at another production possibilities curve which has a slightly different shape: 

This producer is also producing pillows and blankets. Suppose this producer also utilizes all of its resources in their production. Therefore, points representing production levels for this producer will necessarily lie on the PPC as well. We see that this curve is also decreasing but its slope decreases in magnitude giving this curve a “bowed in” concave shape. Let’s observe how the opportunity cost for blankets changes on this graph as we add an extra blanket assuming that the producer utilizes all of its resources in its production. Suppose the producer starts off by producing at Point A where 100 pillows and no blankets are being produced. Now suppose the producer wants to produce an extra blanket. By producing this extra blanket, the producer can now only produce 42 pillows. By producing this extra blanket, the producer misses out on the opportunity of producing 58 pillows and therefore the opportunity cost of producing the extra blanket is 58 pillows. Now suppose the producer wants to produce another blanket for a total of 2 blankets. Now the producer would be producing at Point C where only 18 pillows are being produced. Therefore the producer is missing the opportunity to produce 24 pillows. So, the opportunity cost of producing that extra 2nd blanket is 24 pillows. Suppose the producer wants to produce one more blanket for a total of 3 blankets. Then the producer would now be operating at a production level represented by Point D. At Point D, the producer can only produce 4 pillows. By adding this extra blanket, the producer is missing out on the opportunity of producing 14 pillows and therefore the opportunity cost of producing this 3rd blanket is only 14 pillows. Every time an extra blanket is produced, the opportunity cost of producing that additional blanket decreases. Therefore when a Production Possibilities Curve is bowed in, as shown in the graph above, it is said to have decreasing opportunity cost.

Let’s look at one more graph of a Production Possibilities Curve:

In this graph, we see another producer producing Pillows and Blankets as well. This producer’s Production Possibilities Curve is a line. Let’s observe how the opportunity cost changes as the producer moves from left to right by adding additional blankets and assuming that the producer is utilizing all of its resources in their production. Starting at Point A, we see that the producer is producing 100 pillows and no blankets. If the producer adds another blanket, we see that the producer would be producing at Point B where 70 pillows will be produced. By producing that extra blanket, we see that the producer would be missing out on the opportunity of producing 30 pillows and therefore the opportunity cost of producing that extra blanket is 30 pillows. Now suppose that the producer wants to produce another blanket for a total of 2 blankets. Now the producer would be producing at Point C where 40 pillows are being produced. This means that by producing that 2nd blanket, the producer is missing the opportunity of producing 30 pillows and therefore the opportunity cost of producing that 2nd blanket is also 30 pillows. Now if the producer wants to produce another extra blanket for a total of 3 blankets, then the producer would be producing at Point D. At Point D, the producer would produce 10 pillows. This means that by producing that extra 3rd blanket, the producer misses the opportunity to produce 30 pillows and therefore the opportunity cost of producing that extra 3rd blanket is also 30 pillows. We see that as the producer produces an additional blanket, the opportunity cost for each added blanket remains constant. Therefore, when a Production Possibilities Curve is in the form of a line, as in the graph above, then the Production Possibilities Curve is said to have a constant opportunity cost.