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This is a image. Click on a point on the PPF function to see more about how to visualize and quantify opportunity cost.
The concept of opportunity cost may be illustrated with the production possibilities frontier (PPF). The PPF is a stylized model of a macro economy that is presented to examine the production decisions in the economy and the problem of scarcity. The purpose is to show how scarce resources may be allocated to produce alternative products and, the associated tradeoffs that arise when there is a change in the mix of production.
The PPF model makes some simplifying assumptions about the economy.
Assume it is an island economy that is closed to trade and there is no
money in circulation. In addition, the following assumptions are made:
1. The resource endowment is fixed and finite (including all inputs to
production, such as labor
and the population)
2. The level of technology is fixed
3. The economy is operating at
full employment when attaining production levels depicted by the PPF
4. No other products or money are available.
The production possibilities frontier (PPF) shows all the combinations of the two goods (food and cloth) that could be produced by the economy if resources are efficiently utilized. Points on the PPF show the maximum output of the economy. Points beyond the PPF are not attainable given the resource constraint and points below the PPF are feasible, but inefficient.
The concept of opportunity cost is illustrated with the production possiblities frontier. The slope at each of the points on the PPF reflects the opportunity costs of producing an additional unit of food, expressed in terms of units of the units of cloth that must be sacrificed (there is no money). Click on one of the points on the graph for more narrative about opportunity cost as the "opportunity cost price" of the goods.
The scarcity of resources on the island means that increasing the production of food can only be gotten by reducing the production of cloth. Opportunity costs for more food may be defined as the number of units of cloth given up per additional unit of food. An analysis of the slope of the PPF (click on a point) shows that opportunity costs increase as more food (and hence less cloth) is produced.
Implications of Changing the Assumptions
Changing the initial assumptions of the production possibilities model causes shifts to occur in the diagram. Select one of the shift variables shown below and, include the direction and magnitude of the change. Then see the resulting change in the graph of the diagram....Select or change these parameters.
Inspect graphical results for changes in the assumptions about the Production Possibilities Diagram.Net-Text
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