Question

How does the concept of opportunity costs apply to the use of the production possibilities frontier (PPF) as a comparative measure for output decisions made at the national level?

Answer 1

The production possibility curve is a curve that represents the production of two goods that can be done by a nation given the resources and technology it has. All the points on the production possibility curve show the combination of two goods that can be produced optimally using all the resources in the country. The PPC is concave to the origin and downward sloping. The slope of PPC indicates that for increasing the quantity of a good produced by one unit, the quantity produced of another good has to be decreased (since the resources are limited in a country). This is called the opportunity cost (cost incurred for giving something up for getting something else in return).

Thus the opportunity cost is the slope of PPC that indicates that for increasing the production of a good by one unit, the quantity produced of another good has to be reduced since there are limited resources available in a country. And that's why the output decisions in a country are based on the opportunity cost of producing a good.