Understanding Production Possibilities Frontier and Opportunity Cost

The production possibilities frontier illustrates all possible combinations of two products, showcasing the concept of scarcity and opportunity cost. Along the frontier, opportunity costs are not constant due to the Law of Increasing Costs. Efficient production occurs on the frontier, while points inside represent inefficiency and underutilization of resources. Production outside the frontier requires increased resources or technology.

• Production Possibilities Frontier
• Opportunity Cost
• Scarcity
• Efficiency
• Resource Utilization

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1. The Production Possibilities Curve

2. The production possibilities frontier (the line) shows all the possible combinations of the two products using all the available resources. Since we are using all available resources, increasing the production of one of the goods means decreasing the production of the other good (illustrates idea of scarcity). The decrease in production is the opportunity cost (we had to give up some of one good to get more of the other).

3. Smarties Production Possibilities Frontier A 50 B 40 Lose 20 Smarties (opportunity cost) 30 C 20 Gain 20 Dum-Dums 10 D 0 25 50 70 75 Dum-Dums

4. Opportunity costs are not constant along the frontier. As resources are moved from the production of Smarties to Dum-Dums, increasingly larger amounts of Smarties must be given up to get decreasingly smaller amounts of Dum-Dums. This is known as the Law of Increasing Costs. This happens because resources are not equally suited to the production of both goods.

5. Smarties A 50 Lose 10 Smarties B 40 Lose 20 Smarties 30 C 20 Gain 50 Dum-Dums Gain 20 Dum-Dums 10 D 0 25 50 70 75 Dum-Dums

6. It is possible to produce at any point on the frontier or inside the frontier Only points on the frontier are efficient. Any point inside of the frontier is inefficient and shows an underutilization of resources. When moving from inside the frontier to the frontier there is no opportunity cost because resources were underutilized.

7. Smarties A Efficient production 50 B 40 Inefficient Production or Underutilization of resources F 30 C 20 10 D 0 25 50 70 75 Dum-Dums

8. Production outside of the frontier is not possible with current available resources. If there is an increase in land, labor or capitalOR technology then the frontier will shift outwards. A shift out means that more of both products can be produced.

9. Point G not possible with current resources or technology Smarties A 50 G B 40 30 With more resources or technology the line shifts outward C 20 10 D 0 25 50 70 75 Dum-Dums

10. Nations must make choices about how to use their available resources (guns and butter). An increase in the production of military goods (guns) will cause a decrease in the production of consumer goods (butter). The production possibilities curve can also demonstrate unemployment within an economy (point inside the curve) and economic growth (this curve shifts out).

11. Guns A Economic Growth of Economy 50 B 40 30 Lose 20 Guns U C Unemployed land, labor or capital 20 Gain 20 Butter 10 D 0 25 50 70 75 Butter

12. A PRODUCTIONS POSSIBILITIES CURVES A B B

13. C C D D