Chapter 2: Problem 5

How does the comparative-cost concept relate to a nation's production possibilities frontier? Illustrate how differently shaped production possibilities frontiers give rise to different opportunity costs.

Short Answer

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The comparative-cost concept relates to how efficiently a country can produce certain goods compared to others based on the opportunity costs involved. These opportunity costs are graphically represented on the country's production possibilities frontier (PPF). If the PPF is linear, it suggests constant opportunity costs and equal efficiency in producing both goods. However, if it's bow-shaped, it implies that opportunity costs are increasing, suggesting resources are more efficient in producing one good than the other.

Step by step solution

Understanding the Comparative-Cost Concept

The comparative-cost concept is an economic theory that determines which country should produce which goods based on their opportunity cost. Opportunity cost is the cost of forgoing the next best alternative. For instance, if a country can produce either cars or grains, the opportunity cost of producing one car is the quantity of grains it could have produced instead.

Understanding the Production Possibilities Frontier

The Production Possibilities Frontier (PPF) is a graph that illustrates the combinations of outputs that an economy can produce. The PPF represents all the possible combinations of goods an economy can produce when it uses its resources efficiently. If the PPF is linear, it means that the opportunity costs are constant. If it is bow-shaped, it indicates that resources are not perfectly adaptable to the production of both goods.

Relating Comparative Cost Concept to PPF

The PPF illustrates the concept of comparative cost. The slope of the PPF represents the opportunity cost of producing one good in terms of the other. The PPF shape reveals whether the opportunity costs are constant or increasing. A linear PPF indicates constant opportunity costs, which means the resources are equally efficient in producing both goods. A bow-shaped PPF, however, reflects increasing opportunity costs, which means resources are more suited to producing one good than the other.

Illustrating Differently Shaped PPFs

A linear PPF indicates that opportunity costs are constant as you move from producing one good to another. This implies each unit of output of one good can be exchanged for a fixed unit of the other, whatever the level of output. However, if the PPF is a concave curve (bow-shaped), it means opportunity costs increase as the production of one good increases. This happens because resources are not perfectly adaptable to the production of both goods, hence more and more of one good must be given up to get an additional unit of the other.

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