Question

Why is a production possibilities frontier typically drawn as a curve, rather than a straight line?

Short answer

A production possibilities frontier (PPF) is typically drawn as a curve, rather than a straight line, due to the law of increasing opportunity cost. This law states that as we produce more of one good, the opportunity cost of producing that good increases in terms of the other good, as resources are not perfectly substitutable between the production of different goods. The PPF's curvature accounts for the increasing opportunity cost and represents the trade-offs that an economy experiences when producing different combinations of goods or services.

Step-by-step solution

Define Production Possibility Frontier (PPF)

Production Possibility Frontier (PPF) is a graphical representation depicting the various combinations of two types of goods or services that can be produced by a society with given resources and technology, under the assumption of full employment and productive efficiency. It is a tool used to illustrate the concept of opportunity cost and helps in understanding the trade-offs between two goods or services.

Describe the Law of Increasing Opportunity Cost

The Law of Increasing Opportunity Cost states that when an economy produces more of one good or service, the opportunity cost of producing that good or service, in terms of the other good or service, will increase. This happens because resources are not perfectly substitutable between the production of two different goods. Some resources are better suited for the production of one good, and as we allocate more and more resources to produce that particular good, we will eventually have to use resources which are less efficient, which in turn increases the opportunity cost.

Explain why PPF is curved, not a straight line

A production possibilities frontier (PPF) is typically drawn as a curve, rather than straight-line, due to the law of increasing opportunity cost. If the PPF were a straight line, it would imply that the opportunity cost of producing one good remains constant, regardless of the level of production of the other good. However, this is not the case in reality because resources are not perfectly substitutable between the production of different goods. As we produce more of one good, we experience increasing opportunity costs in terms of the other good. This occurs because we are reallocating resources that are better suited for producing the other good, leading to less efficient production. The PPF's curvature accounts for the increasing opportunity cost and adequately represents the trade-offs that an economy experiences when producing different combinations of goods or services. In summary, the production possibilities frontier is drawn as a curve due to the law of increasing opportunity cost, which states that the opportunity cost of producing one good increases as the production of the other good increases, due to the inefficiency and non-substitutability of certain resources.