How does opportunity cost relate to the PPC?
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In economics, the acronym PPC stands for “production possibilities curve.” This is a curve that illustrates, among other things, the concept of opportunity cost. In order to see the relationship, please refer to this link. I will be using the numbers from that link to show how a PPC represents opportunity cost.
Opportunity cost is the value of what we give up when we choose to take a certain action. Because we have limited resources, we cannot have unlimited amounts of everything. When we use resources to make one thing, we give up the chance to use them to make another thing. This is opportunity cost.
In the PPC in the link, our economy can produce crab puffs and storage sheds. It can produce only limited numbers of each. Every time more of one thing is made, less of the other can be made. In this scenario, when we go from making 0 storage sheds to 1 storage shed, we go from making 450 crab puffs to 445 crab puffs. We have given up 5 crab puffs to make a storage shed. This is the opportunity cost of the first storage shed.
Thus, a PPC shows us how opportunity cost works. It shows us that whenever we make more of one thing, we have to give up the chance to make something else.
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