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Notes:
Production Possibility Curves
Production Possibility Curve
To clarify some confusion that exists in distinguishing between increasing, decreasing,
and constant opportunity costs, the examples which follow are offered.
Case 1: Increasing Opportunity Costs
Production Alternatives
Product
A
B
C
D
Good X
Good Y
9
0
8
3
5
6
0
8
Good X
9
A
B
7
5
C
PPC
3
1
0
D
1
2
3
4
5
6
7
8
9 10
Good Y
On the diagram above, if we read the curve backwards, that is, from D  A, note the
following:
Move D  C give up 2 Good Y to gain 5 Good X (or 2/5 Y to gain 1X).
Move C  B give up 3 Good Y to gain 3 Good X (or 1Y to gain 1X).
Move B  A give up 3 Good Y to gain 1 Good X (or 3Y to gain 1X).
The law of increasing opportunity costs is demonstrated in the move from D  A. This
time to gain equivalent units of Good X increase amounts of Y must be given up. Thus,
the “bowed-out” or concave, shape of the production possibility curve illustrates
increasing costs.
Note: Resources transferred from production of Good X to production of Good Y are
not completely adaptable. This point provides an explanation for the law of increasing
opportunity costs.
Alternatively, when moving from A  D, note the following:
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Move A  B give up 1/3 Good X to gain 1 Good Y (or 1 X to gain 3 Y).
Move B  C give up 1 Good X to gain 1 Good Y (or 3 X to gain 3 Y).
Move C  D give up 5/2 Good X to gain 1 Good Y (or 5 X to gain 2 Y).
This demonstrates the law of increasing cost, that is, in order to get equal units of one
good, society must sacrifice ever-increasing units of the other good. Again, opportunity
costs show foregone or sacrificed production which in this case increase as we move
down the curve from point A to point D.
Case 2: Decreasing Opportunity Costs
possible)
(This is NOT theoretically , or practically
Production Alternatives
Product
A
B
C
D
Good X
Good Z
9
2
7
3
2
8
1
10
Good X
9
A
7
B
5
NOT A PPC
3
C
D
1
0
1
2
3
4
5
6
7
8
9 10
Good Z
In the diagram above when moving from A  D, note the following:
Move A  B give up 2 Good X to gain 1 Good Z (or 2 X to gain 1Z).
Move B  C give up 5 Good X to gain 5 Good Z (or 1X to gain 1Z).
Move C  D give up 1 Good X to gain 2 Good Z (or 1/2 X to gain 1Z).
This demonstrates a case of decreasing opportunity costs, that is from A  D in order
to gain equal units of Good Z fewer and fewer units of Good X must be sacrificed.
If we read the curve backwards, that is, from D  A, note the following:
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Move D  C give up 2 Good Z to gain 1 Good X (or 2 Z to gain 1X).
Move C  B give up 5 Good Z to gain 5 Good X (or 1Z to gain 1X).
Move B  A give up 1 Good Z to gain 2 Good X (or 1/2Z to gain 1X).
Again: The example above moving from D to A demonstrates a case of decreasing
opportunity costs. An explanation for this would be that resources are more than
completely adaptable in production when transferred from producing one good to
another. If decreasing opportunity costs exist it would seem to imply that resources
were not properly utilized in their initial application. This is not to say that they were not
used to their full capacity, but, rather, that they were not in their best application initially.
This case is offered to clear up confusion and is not often found in practice.
Case 3: Constant Opportunity Costs
The graph for constant opportunity costs is a straight line representing perfect
adaptability in transferring resources from production of one good to production of
another good. Linear, or constant, opportunity costs need not be depicted by a one to
one ratio, i.e. it may be 3 to 1, 4 to 1, 500 to 1. Typically constant opportunity costs are
found when there is a strong similarity between the two goods.
Production Alternatives
Product
A
B
C
D
E
Good R
Good S
16
0
12
1
8
2
4
3
0
4
Good R
16
A
B
12
C
8
PPC
4
D
E
0
1
2
3
4
In the diagram above when moving from A  D, note the following:
Move A  B give up 4 Good R to gain 1 Good S.
Good S
4
Move B  C give up 4 Good R to gain 1 Good S.
Move C  D give up 4 Good R to gain 1 Good S.
Move D  E give up 4 Good R to gain 1 Good S.
This demonstrates that opportunity costs do not change, or they are constant, as we
move down the production possibilities curve from A  D. The same conclusion can be
drawn from reading the curve backwards from D  A.