How can a PPF curve be used to show opportunity cost?

We begin by discussing what a Production Possibilities Frontier (PPF) curve is. It is a curve that shows the various combinations of two goods (say cycles and dictionaries) that a firm can produce with given resources and state of technology. Due to the limited nature of resources, the firm cannot produce an infinitely large quantity of both goods and therefore, the firm must make a choice. Hence, in order to increase production of cycles, the firm must reduce production of dictionaries. The sacrifice of units of cycles for units of dictionaries (or vice versa) is the Opportunity Cost. Opportunity Cost is defined as 'the next best alternative foregone'. Thus, in an economy producing only cycles and dictionaries, if 5 dictionaries need to be sacrificed in order to produce one more cycle, then the opportunity cost of producing one more cycle is 5 dictionaries. The rate at which units of one good need to be sacrificed in order to produce an additional unit of the second good is known as Marginal Rate of Transformation or the Marginal Opportunity Cost. Generally, the opportunity cost rises as you move down the PPF as resources are not equally efficient at producing both goods. This gives rise to the concave shape of the PPF curve.

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Answered by Suhasini V. Economics tutor

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