Moving along a PPC means producing more of one good by giving up some of the other.
When an economy is on its PPC, it can only make more of one good by moving resources away from the other. A movement along the curve shows this trade-off.
The amount of the other good given up is the opportunity cost. In the diagram, moving from A to B raises consumer goods from X0 to X1 but cuts capital goods from Y0 to Y1. The fall in capital goods is the opportunity cost of the extra consumer goods.
The PPC is usually bowed out from the origin. This is because resources are not equally good at making both goods. To make more consumer goods, the economy must use resources that are better at making capital goods. So each extra unit of consumer goods costs more capital goods.
The choice between points matters for the future. Producing more capital goods now, such as machines and infrastructure, can help the economy grow later.
- Movement along a PPC
- Reallocating resources between the two goods.
- Opportunity cost on a PPC
- The amount of the other good given up.
- Why bowed out
- Resources are not equally suited to both goods, so opportunity cost rises.
Worked example: Calculating opportunity cost from a PPC
Suppose a country moves from producing 100 machines and 400 tonnes of food to 70 machines and 500 tonnes of food.
- Identify the gain: food rises by 500 - 400 = 100 tonnes.
- Identify what is given up: machines fall by 100 - 70 = 30.
- State the opportunity cost: the extra 100 tonnes of food cost 30 machines.
- Per unit: each extra tonne of food costs 30 / 100 = 0.3 machines.
Watch out for this
A movement along the PPC means the economy has grown.
A movement along the curve changes the mix of output with the same resources. Growth in productive capacity is an outward shift of the whole curve.
Check your understanding
An economy on its PPC decides to produce more healthcare services. What happens?
- It must produce less of the other good; that loss is the opportunity cost.
- It can produce more healthcare without giving anything up.
- The PPC shifts outwards.