Even though each of the plants has a linear curve, combining them according to comparative advantage, as we did with 3 plants in Figure 2.4 "The Combined Production Possibilities Curve for Alpine Sports", produces what appears to be a smooth, nonlinear curve, even though it is made up of linear segments. In Panel (a) we have a combined production possibilities curve for Alpine Sports, assuming that it now has 10 plants producing skis and snowboards. It retains its negative slope and bowed-out shape. 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.įigure 2.5 Production Possibilities for the EconomyĪs we combine the production possibilities curves for more and more units, the curve becomes smoother. Notice also that this curve has no numbers. Notice the curve still has a bowed-out shape it still has a negative slope. This production possibilities curve shows an economy that produces only skis and snowboards. We will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel (b). 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. As we include more and more production units, the curve will become smoother and smoother. This production possibilities curve in Panel (a) includes 10 linear segments and is almost a smooth curve. Its downwards slope reflects scarcity.įigure 2.5 "Production Possibilities for the Economy" illustrates a much smoother production possibilities curve. The bowed-out shape of the production possibilities curve illustrates the law of increasing opportunity cost. There, 50 pairs of skis could be produced per month at a cost of 100 snowboards, or an opportunity cost of 2 snowboards per pair of skis. Plant 3 would be the last plant converted to ski production. The opportunity cost of skis at Plant 2 is 1 snowboard per pair of skis. The next 100 pairs of skis would be produced at Plant 2, where snowboard production would fall by 100 snowboards per month. We would say that Plant 1 has a comparative advantage in ski production. The opportunity cost of the first 200 pairs of skis is just 100 snowboards at Plant 1, a movement from point D to point C, or 0.5 snowboards per pair of skis. It can shift to ski production at a relatively low cost at first. Suppose it begins at point D, producing 300 snowboards per month and no skis. The law also applies as the firm shifts from snowboards to skis. The opportunity cost of each of the first 100 snowboards equals half a pair of skis each of the next 100 snowboards has an opportunity cost of 1 pair of skis, and each of the last 100 snowboards has an opportunity cost of 2 pairs of skis. 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 2.4 "The Combined Production Possibilities Curve for Alpine Sports". The law of increasing opportunity cost holds that 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. 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. We see in Figure 2.4 "The Combined Production Possibilities Curve for Alpine Sports" that, beginning at point A and producing only skis, Alpine Sports experiences higher and higher opportunity costs as it produces more snowboards.
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