Why is ppf bowed out

Notice that this production possibilities curve, which is made up of linear segments from each assembly plant, has a bowed-out shape; the absolute value of its slope increases as Alpine Sports produces more and more snowboards. This is a result of transferring resources from the production of one good to another according to comparative advantage.

We shall examine the significance of the bowed-out shape of the curve in the next section. We see in Figure 2. The fact that the opportunity cost of additional snowboards increases as the firm produces more of them is a reflection of an important economic law.

The law of increasing opportunity cost As an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase. We have seen the law of increasing opportunity cost at work traveling from point A toward point D on the production possibilities curve in Figure 2. The opportunity cost of each of the first snowboards equals half a pair of skis; each of the next snowboards has an opportunity cost of 1 pair of skis, and each of the last snowboards has an opportunity cost of 2 pairs of skis.

The law also applies as the firm shifts from snowboards to skis. Suppose it begins at point D, producing snowboards per month and no skis.

It can shift to ski production at a relatively low cost at first. The opportunity cost of the first pairs of skis is just snowboards at Plant 1, a movement from point D to point C, or 0. We would say that Plant 1 has a comparative advantage in ski production. The next pairs of skis would be produced at Plant 2, where snowboard production would fall by snowboards per month.

The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. Plant 3 would be the last plant converted to ski production. There, 50 pairs of skis could be produced per month at a cost of snowboards, or an opportunity cost of 2 snowboards per pair of skis.

The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. Scarcity implies that a production possibilities curve is downward sloping; the law of increasing opportunity cost implies that it will be bowed out, or concave, in shape.

The bowed-out curve of Figure 2. Suppose Alpine Sports expands to 10 plants, each with a linear production possibilities curve. Panel a of Figure 2. This production possibilities curve includes 10 linear segments and is almost a smooth curve. As we include more and more production units, the curve will become smoother and smoother. In an actual economy, with a tremendous number of firms and workers, it is easy to see that the production possibilities curve will be smooth.

We will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel b. This production possibilities curve shows an economy that produces only skis and snowboards. Notice the curve still has a bowed-out shape; it still has a negative slope. Notice also that this curve has no numbers.

Economists often use models such as the production possibilities model with graphs that show the general shapes of curves but that do not include specific numbers. As we combine the production possibilities curves for more and more units, the curve becomes smoother.

It retains its negative slope and bowed-out shape. In Panel a we have a combined production possibilities curve for Alpine Sports, assuming that it now has 10 plants producing skis and snowboards. Even though each of the plants has a linear curve, combining them according to comparative advantage, as we did with 3 plants in Figure 2.

This curve depicts an entire economy that produces only skis and snowboards. We can use the production possibilities model to examine choices in the production of goods and services. In applying the model, we assume that the economy can produce two goods, and we assume that technology and the factors of production available to the economy remain unchanged.

In this section, we shall assume that the economy operates on its production possibilities curve so that an increase in the production of one good in the model implies a reduction in the production of the other. Clearly, the transfer of resources to the effort to enhance national security reduces the quantity of other goods and services that can be produced. This spending took a variety of forms.

One, of course, was increased defense spending. Local and state governments also increased spending in an effort to prevent terrorist attacks. Airports around the world hired additional agents to inspect luggage and passengers. In terms of the production possibilities curve in Figure 2. Of course, an economy cannot really produce security; it can only attempt to provide it.

The economy produces S A units of security and O A units of all other goods and services per period. A movement from A to B requires shifting resources out of the production of all other goods and services and into spending on security.

The increase in spending on security, to S A units of security per period, has an opportunity cost of reduced production of all other goods and services.

Production of all other goods and services falls by O A - O B units per period. At point A, the economy was producing S A units of security on the vertical axis—defense services and various forms of police protection—and O A units of other goods and services on the horizontal axis.

The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. In this case we have categories of goods rather than specific goods.

Thus, the economy chose to increase spending on security in the effort to defeat terrorism. Since we have assumed that the economy has a fixed quantity of available resources, the increased use of resources for security and national defense necessarily reduces the number of resources available for the production of other goods and services. The law of increasing opportunity cost tells us that, as the economy moves along the production possibilities curve in the direction of more of one good, its opportunity cost will increase.

We may conclude that, as the economy moved along this curve in the direction of greater production of security, the opportunity cost of the additional security began to increase.

That is because the resources transferred from the production of other goods and services to the production of security had a greater and greater comparative advantage in producing things other than security.

The production possibilities model does not tell us where on the curve a particular economy will operate. Instead, it lays out the possibilities facing the economy.

We will see in the chapter on demand and supply how choices about what to produce are made in the marketplace. An economy that is operating inside its production possibilities curve could, by moving onto it, produce more of all the goods and services that people value, such as food, housing, education, medical care, and music. Increasing the availability of these goods would improve the standard of living. Economists conclude that it is better to be on the production possibilities curve than inside it.

Two things could leave an economy operating at a point inside its production possibilities curve. First, the economy might fail to use fully the resources available to it. Second, it might not allocate resources on the basis of comparative advantage.

In either case, production within the production possibilities curve implies the economy could improve its performance. A specific factor is one that is stuck in an industry or is immobile between industries in response to changes in market conditions.

A factor may be immobile between industries for a number of reasons. If a nation prohibits trade with one or more trading partner nations, it is called: embargo. As a nation increases its production of exports, demand for specific or fixed factors such as capital and land used in the exporting sector: will rise. Terms in this set 44 When a country requires fewer resources to produce a product than other countries, it is said to have a n : -absolute advantage in the production of the product.

Consumers can find a given product in more places. Prices decrease as a result of increased production efficiencies. Key Takeaways. A comparative advantage exists when a country can produce goods at lower opportunity cost compared to other countries. It is not possible for a country to have a comparative advantage in all goods. However, a country can have an absolute advantage in all goods. In simple words, gain from trade refers to extra production and consumption effects that countries can achieve through international trade.

These gains are, thus, of two types gain from exchange and gain from specialisation in production. The major sources of gain form trade are specialization, division of labor, expanded size of the market, low per-unit cost, and mass production made possible by the trade and innovation and discovery of new production techniques and products. Yes it is possible. Estimating the net gains from trade can be calculated after adjusting for taxes and exchange rates.

Free trade between countries can increase the variety and reduce the cost of goods, generate job growth, and improve relations between countries. It drives economic growth, enhanced efficiency, increased innovation, and the greater fairness that accompanies a rules-based system. These benefits increase as overall trade—exports and imports—increases.

Opportunity cost can be illustrated by using production possibility frontiers PPFs which provide a simple, yet powerful tool to illustrate the effects of making an economic choice. A PPF shows all the possible combinations of two goods, or two options available at one point in time. The slope of the PPF indicates the opportunity cost of producing one good versus the other good, and the opportunity cost can be compared to the opportunity costs of another producer to determine comparative advantage.

The simplest way to show economic growth is to bundle all goods into two basic categories, consumer and capital goods. An outward shift of a PPF means that an economy has increased its capacity to produce.

If opportunity costs are constant, a straight-line linear PPF is produced. This case reflects a situation where resources are not specialised and can be substituted for each other with no added cost. A straight-line PPF represents constant opportunity costs between two goods. For example, for every unit of X produced, one unit of Y is forfeited. A bowed-outward PPF represents increasing opportunity costs.

A bowed-outward PPF is representative of increasing costs. The slope of the PPF shows the rate at which the production of one good can be transferred to another. Within an economy, if the capacity to produce both goods increases, the result is economic growth. Outward or inward shifts in the PPF can be driven by changes in the total amount of available production factors or by advancements in technology.

Conversely, during times of high unemployment and limited money supply, the frontier will retreat inwards and the total amount of goods that can be produced will decrease. The law of increasing opportunity cost states that when a company continues raising production its opportunity cost increases. Specifically, if it raises production of one product, the opportunity cost of making the next unit rises. Ullah Viti Teacher. When an action is chosen the value of the best alternative not chosen is the?

The opportunity cost of a choice is the value of the best alternative given up. Scarcity is the condition of not being able to have all of the goods and services one wants. Letty Dwerlkotte Reviewer. When opportunity costs are constant the PPF will be a straight line? This straight frontier line indicates a constant opportunity cost.

In reality, however, opportunity cost doesn't remain constant. As the law says, as you increase the production of one good, the opportunity cost to produce the additional good increases. Loyd Herdade Reviewer. How will a reduction in the national unemployment rate affect a nation's PPF? Chaya Freischmidt Reviewer. What are the four factors of production?

Economists divide the factors of production into four categories: land, labor, capital, and entrepreneurship. The first factor of production is land, but this includes any natural resource used to produce goods and services.

Deimante De Dehesa Supporter. What are the assumptions of production possibility curve? The four key assumptions underlying production possibilities analysis are: 1 resources are used to produce one or both of only two goods, 2 the quantities of the resources do not change, 3 technology and production techniques do not change, and 4 resources are used in a technically efficient way.

Milton Turbin Supporter. What determines the shape and position of a production possibilities frontier? A production possibilities frontier defines the set of choices society faces for the combinations of goods and services it can produce given the resources available. The shape of the PPF is typically curved outward, rather than straight.

Over time, a growing economy will tend to shift the PPF outwards. Ask A Question. Co-authors: 8.