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The Law of Increasing Opportunity Cost and the PPC Model

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Published on Aug 15, 2012

In a previous lesson we introduced the basic economic concepts of scarcity, opportunity cost, and the production possibilities curve (PPC). In that lesson, we examined the tradeoffs an individual faces in the use of her time between "work" and "play". We showed that the opportunity cost of one hour of work is always the one hour of play that the individual could have enjoyed instead.

The constant opportunitiy cost between work and play is illustrated in the PPC model as a straight line production possibilities curve. In this lesson, we will expand our understanding of the PPC and opportunity costs by examining the tradeoff a nation faces between the production of two goods using its scarce resources. Cars and pizzas require very different resources to produce, and therefore, as the production of one good increases, the opportunity cost of its production in terms of the other good increases.

The result is a PPC that is bowed outwards from the origin. When choosing between the production of two goods, the more similar the resources needed to produce each good, the straighter the PPC will be. The less similar the resources needed to produce each good, the further the PPC will be bowed out from the origin.

http://www.econclassroom.com/?p=4403

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