Explanation – Production Possibilities Curve – Macro

In class we glossed over the slide which shows a typical real production possibilities curve for an economy with many workers or participants.

The basic question is

Why is the production possibilities curve bowed outward from the origin?

The explanation is important. We call such a “curve convex to the origin” in the language of calculus of two variables.

Remember that economically literate members of the economy will (or should!) switch the workers with the lowest opportunity cost on the y-axis commodity to work on production of the x-axis commodity. This means there will be at first less than average loss of production on the y-axis. later on, as more are switched, they have higher opportunity costs on the y-axis commodity. That means the reduction in production on the y-axis will be more– the slope will be smaller (well, it will be a larger number in absolute value, but more negative– we call that smaller in math!) and so the curve will drop more. finally as the last worker is moved to production of the commodity on the x-axis, he or she is the most productive (highest opportunity cost) on the y-axis, and so the slope will be steepest there.

So the shape is a direct consequence of the low-hanging fruit principle– always switch people with lowest opportunity cost first! See page 48 in your book for a complete explanation!