Short on time? This page is the recap. For explanations, diagrams and worked examples, use the full study guide.
Recap
- Scarcity forces tradeoffs. The opportunity cost of a choice is the next best alternative given up.
- A PPC shows the maximum combinations of two goods an economy can make with all its resources fully and efficiently used and fixed technology.
- On the curve: efficient, full employment of resources. Inside: inefficient, some resources unemployed or badly used. Outside: unattainable with current resources and technology.
- Movement along the curve = a different choice of output. Shift = a change in capacity.
- Shape: straight = constant opportunity cost; bowed outward = increasing (specialised resources, the usual case); bowed inward = decreasing.
- Outward shift (growth): more or better land, labour, capital or entrepreneurship, or better technology/productivity. Inward shift (contraction): resources or productivity lost.
- A change that helps only one good pivots the curve outward along that good’s axis.
Key relationships
| Relationship | Rule | Use it to |
|---|---|---|
| Total opportunity cost | amount of the other good given up | describe a move along the PPC |
| Per-unit opportunity cost of X | Y given up ÷ extra X gained | compare costs step by step |
| Opportunity cost of Y | 1 ÷ (opportunity cost of X) | swap the direction |
| Slope of PPC (size) | opportunity cost of the horizontal-axis good | read costs from a graph |
| Moving from inside to the curve | opportunity cost = 0 | explain why idle resources are wasteful |
Assumptions behind the model
- Two goods (or two groups of goods), one time period.
- Quantity and quality of resources fixed.
- Technology fixed.
- Change any of these and the curve shifts.
Mistakes to avoid
- Calling unemployment a shift. It is a point inside the curve.
- Giving a total when a per-unit cost is asked. Divide by the extra units gained.
- Inverting the ratio. For the cost of one X, the good given up goes on top.
- Mixing up shapes. Bowed outward means increasing opportunity cost.
- Shifting the whole curve when technology improves only one good.
- Unlabelled graphs. Label both axes with the goods and the curve “PPC”.
- Dropping the units. Say “2 tonnes of rice per bicycle”, not “2”.
Quick self-check
- A country can make 80 units of X or 20 units of Y, with constant opportunity cost. What is the opportunity cost of 1 Y? (4 units of X)
- In the study guide, Valdoria moves from 40 to 50 thousand bicycles and rice falls from 60 to 36 thousand tonnes. What is the opportunity cost per bicycle? (24 ÷ 10 = 2.4 tonnes of rice)
- A recession leaves many workers unemployed. Where is the economy on its PPC? (Inside the curve; the PPC does not shift.)
- Valdoria builds many new factories. What happens to its PPC in the future? (It shifts outward.)
Next: practice questions.