Why does a production possibilities curve have a bowed-out...

Key Concepts

Production Possibilities Curve

A production possibilities curve (PPC) is a graphical representation that shows the maximum possible production combinations of two goods or services that can be produced within an economy, given its resources and technology. It illustrates the trade-offs and opportunity costs inherent in allocating limited resources between different production alternatives.

Opportunity Cost

Opportunity cost is the value of the next best alternative forgone when resources are allocated to produce one good over another. In the context of the PPC, it embodies the trade-off between the production of different goods, as resources used for one good cannot be simultaneously used for another, highlighting the cost of reallocating resources.

Increasing Opportunity Cost

The bowed-out shape of the production possibilities curve reflects the principle of increasing opportunity cost. This occurs because resources are often not equally efficient in producing all goods. As production shifts from one good to another, resources that are less suited for the new production must be used, leading to a higher opportunity cost for additional units produced.

Transcript

00:01 Hey everyone, today we're going through problem number 12 from chapter 2, the textbook, which asks why is the production possibilities for into your drawn as a curve rather than a straight line? so in order to answer this question, we're going to go through two different sections from chapter 2.

00:17 And in both, you're given a scenario of healthcare versus education.

00:24 So medical resources and medical technology essentially versus resources for education.

00:32 So it basically states that in this scenario, the lesson is not that society, excuse me, is likely to make an extreme choice, like devoting no resources at all to education at point a or no resources at all to health care at point f.

00:45 Because if they were to make an extreme choice, then you would have a, this would result in a straight line.

01:05 So that kind of explains why it's not a straight line, but why is it curved then? why not any other shape? so in order to answer that, we need to read on.

01:16 Instead, the lesson is that the gains from committing additional marginal resources to education depend on how much is already being spent.

01:26 If on the one hand, very few resources are currently committed to education, then an increase in the resources used can bring relatively large gains.

01:34 On the other hand, if a large number of resources are already committed to education, then committing additional resources will bring relatively smaller gains.

01:43 And this is known, this particular scenario is known as the law of diminishing returns.

01:52 And that explains the bowed -out curvature of a production possibility frontier.

02:00 Law diminishing returns, often return to as the law, refer to as the law of diminishing margin returns.

02:13 Again, it explains how a few resources, are already committed to one part of the ppe.

02:23 So you have this, right, over here.

02:24 You have a ppf like this.

02:26 The few resources are committed like around here and many resources are committed there.

02:33 Then the more i increase this, the more of an effect i'm going to see there, obviously.

02:40 So that's kind of what it says.

02:44 Law of diminishing.

02:56 That kind of explains the curvature...

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