When a production possibilities frontier is bowed outward What does this indicate about opportunity costs?

A student asks…

Why is a PPF bowed outward? Why isn’t it just a line?

What is a PPF?

The quantities of goods and services we can produce are limited by our available resources and by technology. If we want to increase our production of one good, we must decrease our production of something else. The production possibilities frontier (PPF) is the boundary between combinations of goods that can be produced and those that cannot.

To illustrate a PPF, we look at a model economy in which the quantities produced of only two goods—lattes and sandwiches—change, and the quantities produced of all the other goods and services remain the same.

Figure 1 shows the PPF for lattes and sandwiches, which shows the limits to the production of these two goods. We can produce at any point inside the PPF or on the PPF, but we cannot produce outside the PPF. In Figure 1, producing at points A or B is attainable, but producing at point C is unattainable.

What is an opportunity cost?

The opportunity cost of an action is the highest-valued alternative forgone. The PPF makes this idea precise and enables us to calculate the opportunity cost. Along the PPF, there are only two goods, so only one alternative is forgone. To produce more lattes, we must produce fewer sandwiches. The opportunity cost of producing an additional latte is the number of sandwiches we must forgo. And the opportunity cost of producing an additional sandwich is the number of lattes we must forgo.

Why is a PPF bowed outward?

The short answer is: increasing opportunity cost.

The PPF is bowed outward because resources are not all equally productive in all activities. People with many years of experience working for Starbucks are good at producing lattes but not very good at producing sandwiches. So if we move some of these people from Starbucks to Subway, we get a small increase in the quantity of sandwiches but a large decrease in the quantity of lattes.

Similarly, people who have spent years working at Subway are good at producing sandwiches, but they have no idea how to produce a latte. So if we move some people from Subway to Starbucks, we get a small increase in the quantity of lattes but a large decrease in the quantity of sandwiches. The more we produce of either good, the less productive are the additional resources we use and the larger is the opportunity cost of one unit of that good.

Could a PPF be a line?

A linear PPF would arise if resources were equally productive in all activities. In our example, if all workers were equally good at producing lattes and sandwiches, then the PPF would be a line.

Could a PPF be bowed inward?

In cases with extreme specialization of labor or mass production, moving along the PPF would bring decreasing opportunity cost, and the PPF would be bowed inward.

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 Practice: Why is a PPF bowed outward?