Macroeconomics

‭3.‬ ‭Decreasing‬ ‭opportunity‬ ‭cost:‬ ‭Finally,‬ ‭this‬ ‭is‬ ‭a‬ ‭scenario‬ ‭where‬ ‭the‬ ‭PPC‬ ‭is‬

‭curved‬‭inwards‬‭(bowed‬‭in)‬ ‭to‬‭reflect‬‭a‬ ‭decrease‬ ‭in‬ ‭opportunity‬ ‭cost‬ ‭as‬ ‭you‬ ‭move‬ ‭along‬‭the‬‭curve.‬‭Although‬‭rare‬‭in‬ ‭practice,‬ ‭this‬ ‭happens‬ ‭when‬ ‭the‬ ‭value‬ ‭of‬ ‭the‬ ‭frst‬ ‭good‬ ‭given‬ ‭up‬ ‭to‬ ‭increase‬ ‭the‬ ‭production‬ ‭of‬ ‭the‬ ‭second‬ ‭one‬ ‭decreases as you move along the PPC.‬ ‭Example:‬ ‭Now‬‭use‬‭this‬‭PPC‬‭to‬‭calculate‬ ‭the‬ ‭per‬ ‭unit‬ ‭opportunity‬ ‭costs‬ ‭of‬ ‭the‬ ‭same movements:‬ ‭●‬ ‭Movement‬ ‭from‬ ‭C‬ ‭to‬ ‭D:‬ ‭1‬ ‭airplane‬ ‭per‬ ‭yacht‬ ‭●‬ ‭Movement from D to E: 0.33 airplanes per yacht‬ ‭Notice‬ ‭how‬ ‭the‬ ‭opportunity‬ ‭cost,‬ ‭or‬ ‭the‬ ‭quantity‬ ‭of‬ ‭airplanes‬ ‭foregone‬ ‭to‬‭produce‬‭more‬‭yachts,‬ ‭decreased from one point to another.‬ ‭All‬ ‭of‬ ‭these‬ ‭examples‬ ‭illustrate‬ ‭how‬ ‭the‬ ‭opportunity‬ ‭cost‬ ‭changes‬ ‭as‬ ‭production‬ ‭shifts‬ ‭between‬ ‭airplanes‬‭and‬‭yachts‬‭(or‬‭any‬‭two‬‭goods‬‭on‬‭the‬‭PPC).‬‭Each‬‭move‬‭along‬‭the‬‭curve‬‭involves‬‭trading‬‭off‬‭some‬ ‭airplanes‬‭for‬‭yachts,‬‭and‬‭the‬‭calculated‬‭opportunity‬‭cost‬‭helps‬‭us‬‭understand‬‭the‬‭cost‬‭of‬‭making‬‭these‬ ‭choices and allocating resources.‬ ‭Analyzing Diferent Points on the PPC Diagram‬ ‭Now‬‭that‬‭we‬‭have‬‭explained‬‭the‬‭different‬‭shapes‬‭of‬‭the‬‭PPC,‬‭it‬‭is‬‭time‬‭to‬‭analyze‬‭its‬‭points.‬‭Is‬‭a‬‭point‬‭on‬ ‭the curve the same as one below it? What does a point beyond the curve mean?‬

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