Question

How does the convex production-possibility curve reflect the law of increasing relative costs? If the production-possibility curve were a straight line, would this reflect the law of increasing cost?

Short answer

A convex production-possibility curve reflects the law of increasing relative costs because its increasing slope demonstrates that as more of one good is produced, the opportunity cost in terms of the other good also increases. This occurs due to resources not being perfectly adaptable between different types of production. In contrast, a straight-line production-possibility curve does not reflect this law, as its constant slope implies that the opportunity cost remains the same regardless of the level of production.

Step-by-step solution

Define the law of increasing relative costs

The law of increasing relative costs states that as the production of one good increases, the opportunity cost of producing that good in terms of other goods also increases. This happens because resources are not perfectly adaptable across different types of production, and some resources are better suited for producing specific goods.

Explain the production-possibility curve

A production-possibility curve (PPC) shows the maximum combination of two goods that can be produced in an economy, given its available resources and technology. The shape of the PPC depends on the relationship between the opportunity cost of producing the two goods. To understand how the PPC reflects the law of increasing relative costs, we will consider two different shapes of PPC: convex and straight-line.

Explain convex production-possibility curve

A convex PPC implies that as more of one good is produced, the opportunity cost of producing that good increases. This relationship is shown by the increasing slope of the PPC as it moves from one end to the other. Specifically, as the production of one good increases, the PPC becomes steeper, indicating that more of the other good must be sacrificed to produce additional units of the first good. A convex PPC reflects the law of increasing relative costs.

Explain straight-line production-possibility curve

A straight-line PPC has a constant slope throughout its length, which implies that the opportunity cost of producing one good remains constant as more of that good is produced. In other words, the amount of the other good that must be sacrificed to produce additional units of the first good remains the same, regardless of the level of production. A straight-line PPC does not reflect the law of increasing relative costs, since the opportunity cost does not increase as more of one good is produced.

Conclusion

In conclusion, a convex production-possibility curve reflects the law of increasing relative costs because it shows that as more of one good is produced, the opportunity cost of producing that good increases. On the other hand, a straight-line production-possibility curve does not reflect this law, since it implies that the opportunity cost remains constant regardless of the level of production.

Key concepts

Law of Increasing Relative Costs

Imagine you're baking cookies and sewing quilts with the same set of tools. Initially, you can easily switch between baking and sewing without much hassle. But as you dedicate more time to baking more cookies, you might find that the tools ideal for sewing aren't that great for mass cookie production. This is when you start facing increasing difficulties—you need to give up more and more quilting time to bake each additional batch of cookies.

That's the essence of the law of increasing relative costs in economics. It says that producing more of one good can increase the opportunity cost of producing the next unit because your economic resources (like time, tools, or skills) are not perfectly interchangeable between producing different goods. As you make more of one product, you use up the resources that are less and less suited for this production, which leads to higher costs. This concept is crucial in understanding trade-offs and resource allocation in an economy.

Opportunity Cost

Continuing with the analogy of baking and quilting, let's say you decide to spend your whole day baking, which means you have no time left for quilting. The quilts you could have made are your opportunity cost of baking those extra cookies. In economics, this term defines the cost of foregone alternatives when you choose one option over others.

Opportunity cost is the foundation of decision-making; it's what you sacrifice to get something else. For students, understanding this concept helps with better decision-making, allowing them to weigh the benefits and sacrifices associated with their choices, be it studying for an extra hour or taking up a part-time job.

Convex PPC

If you draw a line chart representing the maximum number of cookies and quilts you could make in a day with your resources (like time and tools), you've got yourself a Production-Possibility Curve (PPC). A convex PPC is bow-shaped and shows that as you produce more cookies (and fewer quilts), each additional batch of cookies requires you to give up an increasing number of quilts.

This convex shape reflects the law of increasing relative costs, indicating that resources are not perfectly adaptable. Just like it gets progressively harder to use sewing needles for cookie decoration, it's also harder for an economy to reallocate resources for production without efficiency losses.

Economic Resources

The tools, time, and skills you use for baking and quilting are examples of economic resources. In broader economic contexts, these resources include labor, land, capital, and entrepreneurship. They are the building blocks of all goods and services in an economy.

These resources are finite, which means they must be allocated efficiently to optimize production and satisfy as many needs and wants as possible. Scarcity of resources and efficiency in their use directly influence the shape and position of the production-possibility curve, which in turn impacts an economy's production capabilities and trade-offs.