Question

A country's production possibilities curve is bowed outward from the origin. This is caused by the concept known as

A.	The law of increasing returns
	B.	Ockham's Razor
	C.	The law of increasing opportunity costs
	D.	The law of diminishing costs

LEARN

Answer 1

Answer

C. The law of increasing opportunity costs

A country's production possibilities curve is bowed outward from the origin. This is caused by the concept known as the law of increasing opportunity costs.

The Production Possibility Curve (PPC) shows, the maximum possible amount and combination of of two goods in a two goods economy, that can be produced by using all the available resources and technology of production in the economy.In the above figure, the horizontal line shows the amount of good X, and the vertical line shows the amount of good Y , an economy or country is producing by using its resources and technology. The Blue curve is the PPC curve of the country.It shows different combinations of good X, and good Y that the country can produce by its resources.Now if the country employs all its resources in the production of good 'Y', it can produce maximum of 40 units of 'Y' , and then the production of good 'X' will be '0'. If the country employs all its resources in the production of good 'X', it can produce maximum of 5 units of 'X' , and then the production of good 'Y' will be '0'. The gradual movement from good 'Y' to good 'X' shows the decrease in the production of good 'Y' for the increase in the production of good 'X' , i.e. giving up the production of good 'Y' for the production of good 'X'. From the PPC curve in the figure, it is clear that for every '1' unit increase in good 'X', the country is sacrificing more and more of good 'Y', i.e. the opportunity cost of production is rising for every '1' unit increase of good 'X'.This means that the marginal opportunity cost of production is gradually rising for an extra unit increase of the production of good 'X'. This happens because of the limited availability of the resources in a country and their specialization for a particular good, like here some resources are specialized in the production of good 'X' and some are specialized in the production of good 'Y'.So, when the resources that are specialized in the production of good 'Y' are transferred to the production of good 'X' , their productivity declines.As their productivity declines in the sector of good 'X',so more resources are needed for the desired production of good 'X'.Now as the resources are limited in the country, so when more resources are employed in the production of good 'X', more and more of good 'Y' has to be sacrificed.So the opportunity cost of production gradually rises. This is the reason why PPC  is bowed outward from the origin or concave to origin. Again as the production of one good can not be increased without the sacrifice of the production of another good, so the PPC is downward sloping.

(N.B - Marginal opportunity cost - Change in opportunity cost due to change in one extra unit production of a good.)

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