Opportunity Cost & PPC: Understanding Their Connection and Impact

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What is Opportunity Cost?

Opportunity cost is the value of the best alternative that must be given up to take an action or make a choice. It represents the trade-offs when making a decision. For example, let’s say you spent $100 on tickets for a football match. The opportunity cost would be all the other things you could have spent the $100 on, such as a new pair of shoes.

What is the Production Possibilites Curve (PPC)?

The production possibilities curve (PPC) is a graph that shows the maximum obtainable combination of two goods or services that can be produced with available resources and technology. To be able to push the curve outwards, the company has to improve quality, quantity or technology. In the other hand, if you have a point within the curve, it means that company is not allocating its resources at maximum efficiency, meaning they are not achieving their full production potential.

How does the PPC connect to Opportunity Cost?

As visible on the example above, the PPC is typically bowed out, because of the law of increasing opportunity cost. As more resources are allocated to producing one good, the opportunity cost of producing that good increases. With this in mind, when looking at the PPC we can see the trade-off between two goods(opportunity cost), and calculate that value at any point in the curve. For example, using the graph above, at point D, the company produces 9 apples and 3 oranges, meaning the opportunity cost for this point is 6 oranges.

In summary, the PPC illustrates the trade-offs and opportunity costs involved in production decisions. The slope of the PPC equals the opportunity cost at any point, and the bowed-out shape reflects the increasing opportunity cost of production

Key Terms:

• Opportunity Cost - The value of the next best alternative that is forgone when making a decision. It represents the trade-offs when choosing one option over another

  
  

• Production Possibilities Curve (PPC) - A graph that shows the maximum possible combinations of two goods or services that can be produced with available resources and technology

  
  

• Law of Increasing Opportunity Cost - The principle that as more resources are allocated to producing one good, the opportunity cost of producing that good increases

  
  

• Trade-Offs - The compromises that occur when choosing between two or more options, reflected in the opportunity cost

  
  

• Resource Allocation - The process of distributing available resources among various uses to achieve maximum efficiency or production

  
  

• Efficiency - In the context of PPC, efficiency refers to the optimal use of resources where the economy is producing the maximum output with the given resources and technology

  
  

• Slope of the PPC: This refers to the rate at which one good must be sacrificed to produce more of another good, representing the opportunity cost

  
  

• Bowed-Out Shape - Describes the typical shape of the PPC, which is concave to the origin, indicating increasing opportunity costs as more of one good is produced

  
  

• Full Production Potential: The point at which all resources are being used most efficiently, typically represented by points on the PPC

  
  

• Point Inside the Curve: This represents underutilization of resources, meaning the economy is not operating at full efficiency

  
  

• Point on the Curve: Represents an efficient allocation of resources where the economy is producing the maximum possible output

  
  

• Point Outside the Curve: Represents a level of production that is currently unattainable with the available resources and technology

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Sources:

Geeksforgeeks.org, 2024, media.geeksforgeeks.org/wp-content/uploads/20240418164334/PPC-of-Apple-and- Orange.webp. Accessed 2 Sept. 2024.

“Production Possibility Frontier (PPF): Purpose and Use in Economics.” Investopedia, 2024, www.investopedia.com/terms/p/productionpossibilityfrontier.asp. Accessed 2 Sept. 2024.

“Production Possibilities Curve and Opportunity Cost – UNISA.” Econdev.co.za, 2018, econdev.co.za/lesson/overview-ppc/production-possibilities-curve-and-opportunity-cost/. Accessed 2 Sept. 2024.

Production Possibilities Curve | PPC Definition, Graph & Examples Video. “Production Possibilities Curve | PPC Definition, Graph & Examples - Lesson | Study.com.” Study.com, 2023, study.com/academy/lesson/applying-the-production-possibilities-model.html. Accessed 2 Sept. 2024.