#Economics coconuts capital island plus#

But the direction that PPF is curved comes from the way that the trade-offs change. If every trade-off were the same, it would create a straight line. The production possibilities frontier (PPF) is curved because the cost of production is not constant. In this example, the company would maximize its profits by making an equal amount of each bar (“Point C”). Because the opportunity costs are changing at different combinations of production, the boundary of the PPF is not a straight line. The situation is reversed at the other end of the PPF curve (“Point B”). At that point (“Point A”), the decision is between the 14th batch of dark chocolate and the first batch of milk chocolate – which has a cost of just $25.

#Economics coconuts capital island plus#

If you only produce dark chocolate bars, the 14th batch of 100 units would cost $38 ($25 for the first 100 plus $13 in escalating costs at a rate of $1 per batch). In this situation, the choice between products is not equal across all production levels. So, the second batch of 100 chocolate bars costs $26 to make. Each 100 increment increases the cost by one dollar. Let’s say that a business that makes chocolate bars has an increasing marginal cost of production - Imagine that sourcing the chocolate costs more as you try to increase production.įor example, the first 100 chocolate bars cost $25 to make. Therefore, there is not a set cost when choosing between two products. However, the law of supply states that the marginal cost of production (the cost of increasing production by one unit) tends to increase as production increases. If the cost were linear (making one milk chocolate bar implies making one less dark chocolate bar), then the boundary of the production possibility frontier would be a straight line. Whenever you must choose between making one product or another, you bear an opportunity cost in the amount of the alternative you did not choose. The frontier shows all possible combinations. That is what it means to have a frontier rather than an output equation. So, every combination inside that line is also possible. However, nothing requires that machine to run 24 hours a day. That means that if the machine is in constant use, the combinations on that line are the maximum possible output. The line that is generated from that equation is the boundary of the production possibility frontier. Or, they could split the time in half, ending up with 720 of each. On the other hand, they could make 1,440 dark chocolate and no milk chocolate candy bars. If the company only made milk chocolate, there would be 1,440 of them and no dark chocolate ones. With this framework established, we can plot all of the possible outputs in a day. That is, the opportunity cost of making a milk chocolate bar is a dark chocolate bar.

There is also a one-for-one trade-off for each candy bar. Let’s also assume that the machine makes one bar per minute, for a maximum of 1,440 bars per day. So, using the machine to make milk chocolate means that it is unavailable for dark chocolate ones. For simplicity, let’s assume the company only has one machine that makes the candy bars. Let’s imagine a business that only makes two types of candy bars: milk and dark chocolate. It is easiest to understand the PPF by visualizing it in just two dimensions. For a country, there can be thousands of products that it can make and a near-infinite combination of production possibilities. The production possibility frontier (PPF) can be very complex when there are several items to choose between.