Economics – Production possibility curves | e-Consult

Economies of scale refer to the situation where the opportunity cost of producing one good decreases as the quantity produced increases. This is often due to factors like specialization of labour, improved efficiency, and bulk purchasing. On the PPC, economies of scale are represented by a concave PPC. As more of one good is produced, less of the other good needs to be sacrificed. This reflects the increasing efficiency gained with larger-scale production.

Increasing opportunity costs occur when producing more of one good requires increasingly larger sacrifices of the other good. This is because resources are not perfectly adaptable between the production of different goods. On the PPC, increasing opportunity costs are represented by a convex PPC. This shape indicates that as we shift resources from producing one good to another, the amount of the first good we have to give up increases. This is because the resources being shifted are becoming less and less suited to the production of the new good.

Diagram: A diagram would show a PPC with a convex shape. The axes would represent two goods (e.g., wheat and cars). Points on the PPC represent efficient combinations. A point inside the PPC represents inefficient production (underutilisation of resources). The shape of the PPC clearly illustrates the increasing trade-offs involved in producing more of one good at the expense of the other.