University of Balamand

Faculty of Business & Management

Survey of Economics

Slope and Shifts of the PPF:

∆y
 Slope of PPF = = opportunity cost of 1 unit of x.
∆x

 The slope of the PPF is negative (sign) and increasing (value).

Negative:
 Graphically: the PPF slopes downwards.

 Meaning: to increase one production, we have to decrease the other one.

 Reason: scarcity of resources.

As all the points on the PPF represent the maximum usage of resources, to increase
1 production, we have to transfer resources from the other production, thus it will
decrease.

Increasing: (=increasing opportunity cost)

 Graphically: the PPF is concave to the origin.

 Meaning:
∆Guns 14−15
opportunity cost of1st butter = ∆Butter = 1−0 = |-1|Guns

∆Guns 12−14
opportunity cost of2nd butter = ∆Butter = = |-2|Guns
2−1

∆Guns 9−12
opportunity cost of3rd butter = ∆Butter = = |-3|Guns
3−2

To increase the production of 1 good by additional units, we have to give up

more and more of the other good.

 Reason: resources are specialized = they’re more suited for 1 production than
the other  they’re not perfectly transferable.
(to increase butter by successive units, I’m taking away resources specialized in
gun production and putting them in butter  each time gun production is hurt
more and more)
We need to re-educate the workers, adapt machines…

 Conclusion:
The PPF decreases (slope is negative) at an increasing rate (slope increases).

 When you’re asked to get the opportunity cost of 1 unit  divide.

When you’re asked to get the opportunity cost of more than 1 unit  don’t divide.
University of Balamand
Faculty of Business & Management
Survey of Economics

∆Guns 5−9
 opportunity cost of4th butter = slope of PPF DE = ∆Butter = 4−3 = |-4|Guns

 opportunity cost of1st 4 butter = ∆𝐺𝑢𝑛𝑠AE = 5-15 = |-10| Guns

 Impossible slopes of the PPF:

 It can never be upward sloping because there’s always scarcity

 It can never be convex, unless there is a decreasing opportunity cost which is
unlikely to happen for an economy as a whole.

 Other possible shape of PPF:

It can be a straight line if the resources are perfectly transferable from 1 production
to the other – case of very similar productions.
If you see this  it’s for simplification reasons.
Constant slope and constant opportunity cost.
Resources are still specialized but they are perfectly transferable because the 2
productions are very similar.

 Shifts of the PPF:

Over time, the PPF might shift to the left or to the right.

 Shift to the right = increase in the PPF = growth in the potential of the
economy

Reasons:
1- Discover new resources.
2- Discover a new technology.
If: a technological advance in butter production  the PPF will rotate
and the extreme of butter will increase:

If: a technological advance in gun production  the PPF will rotate and
the extreme of gun will increase:

3- Capital Investment:
ovens ovens

Pizza Pizza

A B

2 countries start with the same PPF.

A produces at X  lots of pizza, few ovens  B invests in capital more than A
B produces at Y  lots of ovens, few pizzas
University of Balamand
Faculty of Business & Management
Survey of Economics

Over time, B will be able to use the produced ovens to make more pizzas
than before  ovens

Pizza

While the PPF of A will stay the same or slightly rotate.

 Shift to the left = decrease in PPF = decrease in the maximum achievable:

Reasons:
1- Resources dry out.
2- Resources are destroyed: war, natural disaster…
3- Brain Drain.
4- Theoretically: decrease in technology.