The Economic ProblemThe Economic ProblemPPC’s and the Law of Increasing PPC’s and the Law of Increasing

CostsCosts

Production Possibility CurveProduction Possibility Curve

A visual demonstration of what can be A visual demonstration of what can be produced given the limited amount of produced given the limited amount of resources availableresources available

PPC’s demonstrate opportunity costs as PPC’s demonstrate opportunity costs as you move along the curve and decide to you move along the curve and decide to produce one good vs. anotherproduce one good vs. another

Production Possibility Curve – Production Possibility Curve – Straight LineStraight Line

Straight Line PPCStraight Line PPC

A Straight Line PPC assumes the following:• homogeneous inputs to the production process• same material, identical tools, and labour that is equally skilled for both products• similar outputs – ie. Leather pants and leather moccasins

Production Possibility Curve – Production Possibility Curve – ConcaveConcave

Concave PPCConcave PPC

For a Concave PPC: • opportunity costs increase as you produce more of one product• this is called the Law of Increasing Costs

Concave PPCConcave PPCLaw of Increasing Costs

• As the production of any single item increases, the per unit cost of producing additional units of that item will rise

• Why?

• not all resources are equally suitable for the production of different products.

ie. Links and Smiles example• ie. Switching Sports example

Therefore a larger quantity of less suited resources will need to be reallocated to obtain the extra production of the other good, causing the opportunity cost to rise.