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3 (11) - 28 The bowed-out shape of the production...

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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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