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Why is the production possibilities curve bowed-out in shape?
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The reason for the shape of the Production Possibilities Curve (PPC) is something called the law of increasing opportunity costs. Basically, what this means is that as an economy devotes more of its resources to one kind of product, it becomes less efficient. This is why the PPC is flatter at its end points and more curved in the middle.
If an economy produces two kinds of goods, it stands to reason that some of its productive resources will be more efficient at making one kind of good and some will be better at making the other. Some of them will be equally good at either. For example, imagine that our economy can make capital goods or consumer goods and services. Some people will be good at making either. But there will be some people who are only good for making consumer goods or services (let’s say they are really good at dealing with people and are good salespeople) while others will only be good at making capital goods.
As the economy makes choices in the middle of the curve (making large amounts of both) it can use everyone very efficiently. But let’s say it starts to make only capital goods. The people who are only good for dealing with people will be practically worthless. As they are employed to make capital goods, they will create less marginal product. This means that the curve will flatten out as it gets toward its endpoints.
Posted by pohnpei397 on April 13, 2013 at 12:27 AM (Answer #1)
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