Unformatted text preview: 28 The bowed-out shape of the production possibility 20ﬁsh PART 1 WHAT IS ECONOMICS? nouns 2-2 Increasing Opportunity Cost Producing tire ﬁrst . . . requires giving
. . . . up 5 coconuts.
frontier reflects rncreasrng opportunity cost. In this example. to produce the ﬁrst 20 ﬁsh. Tom But producing 26
must give up 5 coconuts. But to produce an addi- more ﬁsh . . .
tional 20 ﬁsh. he must give up 25 more coconuis. . . . requires
giw'ng up 25
more coconuts. |
50 Quantlty of fish Figure 2-2 illustrates a different assumption. a case in which Tom faces increasing
opportuniw cost. Here, the more fish he catches. the more coconuts he has to give up to
catch an additional fish. and vice versa. For example. to go from producing zero ﬁsh to
producing 20 fish. he has to give up 5 coconuts. That is, the opportunity cost of those
20 ﬁsh is 5 coconuts. But to increase his ﬁsh production to 40—that is. to produce an
additional 20 fish—he must give up 25 more coconuts. a much higher opportunity cost.
As you can see in Figure 2-2, when opportunity costs are increasing rather than constant,
the production possibility frontier is a bowed-out curve rather than a straight line. Although it’s often useful to work with the simple assumption that the production
possibility frontier is a straight line, economists believe that in reality opportunity
costs are typically increasing. When only a small amount of a good is produced, the
opportunity cost of producing that good is relatively low because the economy needs
to use only those resources that are especially well suited for its production. For exam-
ple. if an economy grows only a Small amount of corn, that corn can be grown in
places where the soil and climate are perfect for corn-growing but less suitable for
growing anything else. like wheat. So growing that corn involves giving up only a
Small amount of potential wheat output. Once the economy grows a lot of corn. how-
ever. land that is well suited for wheat but isn’t so great for corn must be used to pro-
duce corn anyway. As a result. the additional corn production involves sacriﬁcing
considerably more wheat production. In other words. as more of a good is produced.
its opportunity cost typically rises because well-suited inputs are used up and less
adaptable inputs must be used instead. Economic Growth Finally. the production possibility frontier helps us understand
what it means to talk about economic growth. We introduced the concept of economic
growth in the Introduction. defining it as the growing ability of the economy to produce
goods and services. As we saw. economic growth is one of the fundamental features of
the real economy. But are we really justified in saying that the economy has grown over
time? After all. although the U.S. economy produces more of many things than it did a
century ago. it produces less of other things—for example. horse-drawn carriages.
Production of many goods, in other words, is actually down. So how can we say for sure
that the economy as a whole has grown? The answer, illustrated in Figure 2-3. is that economic growth means an expansion
of the economy's production possibilities: the economy can produce more of everything.
For example. if Tom's production is initially at point A (20 ﬁsh and 25 coconuts}. ...
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- Spring '08