Increasing Opportunity Cost in AP Macroeconomics

Why specialized resources bow the PPC outward

Say an economy makes capital goods and consumer goods. When it first shifts resources toward capital goods, it moves the workers, land, and machines that are best at making capital goods and weakest at making consumer goods. The economy gets a lot of capital output for a small consumer-good sacrifice.

As it keeps shifting, the resources left to move are the ones that were great at consumer goods and poor at capital goods. Each extra unit of capital now costs many more consumer goods. That rising sacrifice makes the curve get steeper as you move along the horizontal axis, which is exactly what a bowed-out curve looks like.

This sits in Unit 1 (Basic Economic Concepts), Topic 1.2: Opportunity Cost and the Production Possibilities Curve. The course expects you to know that the PPC's shape depends on whether opportunity costs are constant, increasing, or decreasing, and increasing cost is the reason the typical PPC is curved instead of straight.

Calculating the rising cost from a PPC table

Here's a production schedule for a country choosing between capital goods and consumer goods:

• Point A: 0 capital, 100 consumer
• Point B: 1 capital, 95 consumer
• Point C: 2 capital, 85 consumer
• Point D: 3 capital, 70 consumer
• Point E: 4 capital, 50 consumer
• Point F: 5 capital, 25 consumer

To find the opportunity cost of each capital good, subtract consumer output between neighboring points. Going from A to B costs 5 consumer goods. Then B to C costs 10, C to D costs 15, D to E costs 20, and E to F costs 25. The per-unit sacrifice keeps growing, so this is increasing opportunity cost.

A question might also ask about a bigger move. Going from A to D gives up 30 consumer goods in total (100 minus 70). Since that move gains 3 capital goods, the cost per capital good over that range is 10 consumer goods.

It works in the other direction too. Moving from F to E gains 25 consumer goods for 1 capital good, so each consumer good costs 1/25 of a capital good. Moving from B to A gains only 5 consumer goods for that same 1 capital good, so each one costs 1/5 of a capital good. Opportunity cost rises for whichever good you're producing more of. That's the calculation skill Topic 1.2 asks for: pulling numbers off a PPC or a table and figuring out how much of one good is given up to get more of the other.

Bowed out vs. straight line vs. bowed in

The comparison that trips people up is increasing versus constant opportunity cost. Constant cost means the tradeoff ratio never changes, like giving up 10 consumer goods for every capital good at every point. That produces a straight-line PPC, and it assumes resources are perfectly adaptable between the two goods. That assumption is what separates the two models. Increasing cost assumes resources are specialized.

The quick check on a table is to find the opportunity cost between each pair of points. When each move gains the same number of units, you can just compare the amounts sacrificed. Otherwise, divide each sacrifice by the number of units gained to get the cost per unit. If that cost stays the same, the cost is constant. If it grows, the cost is increasing. If it shrinks, the cost is decreasing, and the curve bows inward toward the origin (convex). That bowed-in shape is also what people accidentally draw when they flip an increasing-cost curve.

Another wrong answer to watch for blames the curved shape on scarcity or inefficiency. Scarcity explains why there's a tradeoff at all, and inefficiency shows up as a point inside the curve. Neither one explains the bow. The bow comes from resources not being equally suited to both goods.

What multiple-choice and free-response PPC tasks ask for

When a question asks why a PPC is concave, the answer it wants is specialized, imperfectly adaptable resources. In the multiple-choice section, that idea sits behind stems asking for the underlying cause of a concave PPC or the assumption that separates increasing from constant cost. For a question asking which table shows increasing opportunity cost, calculate the opportunity cost between successive points and look for an increase.

PPC concepts can also be tested in the free-response section, in questions that ask you to draw a graph, explain the curve's shape, or calculate an opportunity cost. A strong answer draws the PPC shape the question implies: bowed outward for increasing opportunity cost, a straight line for constant cost, or bowed inward for decreasing cost. It also labels both axes with the goods and plots points on the curve for efficient production or inside it for inefficiency.

If asked for opportunity cost, give the amount of the other good forgone for the change the question describes. If the question asks for a per-unit cost, divide that amount by the number of units gained. A four-function calculator handles that division.