Production Possibilities Curve and Law of Increasing Opportunity Cost

23 Apr


PRODUCTION POSSIBILITIES CURVE is a curve showing the different combinations of goods and services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.Each point on the production possibilities curve represents some maximum out­put of the two products. The curve is a production frontier because it shows the limit of attainable outputs. To obtain the various combinations of goods on the production possibilities curve, society must achieve both full employment and pro­ductive efficiency.Points lying inside of the curve are attainable, but they are inefficient and therefore are not as desirable as points on the curve. Points inside the curve imply that the economy could have more goods if it achieved full employment and productive efficiency. Points lying outside of the production possibilities curve would represent a greater output than the output at any point on the curve. Such points, however, are unat­tainable with the current supplies of resources and technology.

Law of Increasing Opportunity Cost
   Because resources are scarce relative to the virtually unlimited wants they can be used to satisfy, people must choose among alternatives. The amount of other products that must be sacrificed to obtain one unit of a specific good is called the opportunity cost of that good. What is the economic rationale for the law of increasing opportunity costs? Why do we have to sacrifice some goods in order to obtain others? The answer is that resources are not completely adaptable to alternative uses. Many resources are better at producing one good than at producing others. This lack of perfect flexibility, or interchangeablility, on the part of resources is the cause of increasing opportunity costs.

Term:
Law of increasing opportunity costs As the production of a good increases, the opportunity cost of producing an addi­tional unit rises.

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