Have you been to a frontier lately? whether you realize it or not, the economic climate has a frontier—it has an external limit of financial production. In this episode of theEconomic Lowdown video clip Series, economic education professional Scott Wolla explains how the manufacturing possibilities frontier (PPF) illustrates some an extremely important economic concepts.
You are watching: The law of increasing costs means that when an economy increases the production of one item
Segment 3 that The manufacturing Possibilities Frontier provides the production possibilities frontier to demonstrate how, in the real world, opportunity cost increases as production increases. This is a complicated concept made basic using the PPF.
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Below is the complete transcript of this video presentation. It has actually not been edited for readability, and also there might be slight differences in between the text and also the video.
Our final lesson concentrates on the shape of the frontier line. As much as this suggest we"ve graphed the PPF as a straight line. However, a straight line doesn"t finest reflect how the real economic climate uses sources to develop goods. Because that this reason, the frontier is usually drawn as a curved line the is concave to the origin.This bent line illustrates our fifth and final lesson.
Lesson 5: The regulation of raising opportunity cost: together you boost the manufacturing of one good, the opportunity cost to produce the additional great will increase.
First, remember the opportunity expense is the value of the next-best alternative when a decision is made; it"s what is offered up.
So let"s compare straight and curved frontier lines to far better understand what is an ext likely to happen when manufacturing changes.
Here"s the right frontier line again.
It shows that Econ Isle can produce a preferably of 12 gadgets and also 6 widgets or any type of other combination along the line.
At this point, Econ Isle can produce 12 gadgets and also 0 widgets. This point shows widget production increased by 2, and also this through 2 more, and this by 2 more, indicating all widgets and also no gadgets.
So follow me the directly line, every time Econ Isle rises widget manufacturing by 2, it loses the opportunity to develop 4 gadgets. This directly frontier line shows a continuous opportunity cost.
In reality, however, opportunity cost doesn"t stay constant. Together the regulation says, as you boost the manufacturing of one good, the opportunity expense to develop the additional good increases.
If Econ Isle transitions from widget production to device production, that must provide up one increasing variety of widgets to develop the same variety of gadgets. In various other words, the more gadgets Econ Isle decides come produce, the better its opportunity price in terms of widgets.
If Econ Isle"s production moved in the opposite direction, from all tools to all widgets, the legislation would still hold: together you increase the manufacturing of one good, the opportunity expense to create the additional good increases.
Why walk this happen? Well, some resources are much better suited for some jobs than others. For example, numerous Econ Isle workers are likely really productive gadget makers. In the transition to widget production, workers would most likely need training and time to develop the skills required to be as fertile at making widgets together making gadgets. Together the economic climate transitions from tools to widgets, the gadget workers finest suited come widget manufacturing would shift first, climate the workers much less suited, and finally the employees not at all well suited to widget production.
Here"s where the curved frontier line comes in. It reflects that opportunity cost varies along the frontier.
Let"s rise widget production in increments the 2 again until only widgets and also no tools are produced. However this time we"ll take into consideration opportunity expense that varies along the frontier.
This allude remains the same. In ~ this point, Econ Isle can produce 12 units of gadgets and also 0 widgets.
Here"s widget production raised by 2. In ~ this point, Econ Isle can produce 10 gadgets and 2 widgets. It loses the possibility to develop 2 gadgets. In various other words, the opportunity cost of creating 2 widgets is 2 gadgets.
Here"s widget production enhanced by one more 2. At this point, if Econ Isle to produce 6 gadgets, the can develop only 4 widgets, therefore it loses the chance to develop 4 gadgets. In other words, the opportunity expense of producing 2 widgets is now 4 gadgets.
Finally, increasing by one more 2, Econ Isle can produce 0 gadgets and also 6 widgets. It loses the opportunity to create 6 gadgets. In other words, the opportunity cost of creating 2 widgets is now 6 gadgets.
Although the manufacturing possibilities frontier—the PPF—is a simple economic model, it"s a great tool for portraying some really important financial lessons: The frontier line illustrates scarcity—because it mirrors the limits of exactly how much deserve to be produced with the given resources. Any type of time you relocate from one allude to one more on the line, opportunity expense is revealed—that is, what friend must give up to obtain something else. Points within the frontier suggest resources that room underemployed. In turn, movement from a point of underemployment towards the frontier indicates financial expansion. When the frontier heat itself moves, economic growth is under way. And finally, the bent line of the frontier illustrates the legislation of increasing opportunity cost definition that rise in the production of one good brings about increasing accident of the other an excellent because resources are not suited for every tasks.
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I hope you have appreciated your trip to the frontier and also learned some valuable lessons about economics along the way.
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