Opportunity Cost on a PPF
Concave PPF for cars and wheat showing the opportunity cost of a move along the frontier: going from 100 to 120 cars cuts wheat from 300 to 270 tonnes, so each extra car costs 30 / 20 = 1.5 tonnes of wheat.
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This PPF shows the maximum combinations of cars and wheat an economy can produce with its resources fully and efficiently employed. Points A (100 cars, 300 tonnes of wheat) and B (120 cars, 270 tonnes of wheat) both lie on the frontier, so both are productively efficient. Moving from A to B, output of cars rises by 20 while output of wheat falls by 30 tonnes: resources have to be moved out of wheat to make the extra cars. The opportunity cost of each extra car is therefore 30 / 20 = 1.5 tonnes of wheat. Because the PPF is concave (bowed outwards), this cost is not constant: further moves towards more cars give up ever more wheat per car, since resources suited to farming are less productive in car making.
Key points
- Opportunity cost is the next best alternative forgone; on a PPF it is the amount of the other good given up
- Moving from A (100 cars, 300 tonnes) to B (120 cars, 270 tonnes) gains 20 cars and gives up 30 tonnes of wheat
- Opportunity cost of one extra car = 30 ÷ 20 = 1.5 tonnes of wheat
- Both A and B are on the PPF, so both are productively efficient: more cars can only come from less wheat
- A concave PPF means increasing opportunity cost: each further extra car costs more wheat than the last
Exam tip
Always show the calculation: opportunity cost per unit = what is given up ÷ what is gained. Here, moving from A (100 cars, 300 tonnes of wheat) to B (120 cars, 270 tonnes) gives up 30 tonnes of wheat to gain 20 cars, so each extra car costs 30 ÷ 20 = 1.5 tonnes of wheat. State the units (tonnes of wheat per car) and say which good is being given up.
Common mistakes
Students often divide the wrong way round (20 ÷ 30 gives the opportunity cost of a tonne of wheat in cars, not the cost of a car in wheat), or give the total change (30 tonnes) instead of the cost per extra car. They also forget the units, or describe the move from A to B as a shift of the PPF when it is a movement along the frontier.
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