Final answer:
The bowed-outward shape of the PPF reflects the law of increasing opportunity costs, indicating that resources are less adaptable and efficiently used when transitioning from producing one good to another.
Step-by-step explanation:
The Production Possibilities Frontier and the Law of Increasing Opportunity Cost
To comprehend why the production possibilities frontier (PPF) is bowed outward, we must examine the concept of opportunity cost. The PPF is a model that illustrates the combination of two goods or services that can be produced with the full utilization of a given set of resources. When a PPF is curved or bowed outward, it represents the principle of increasing opportunity costs, which states that as more resources are dedicated to the production of one good (e.g., healthcare), the opportunity cost of producing additional units of that good increases. This is because resources are not equally efficient in producing every good.
Consider point A on a PPF where all resources are allocated to healthcare, with none left for education. Moving resources from healthcare (point A) to education (point B) would initially cause a little decrease in healthcare output since the last units of healthcare resources are less productive, while the gains in education would be substantial because it starts from zero. This explains why from A to B, the PPF would be relatively flat, reflecting the small reduction in healthcare for a large increase in education. On the other hand, as one continues to transfer resources, the opportunity cost increases, leading to the bowed-outward shape of the PPF. This is in contrast to budget constraints which are straight lines due to the constant relative prices determining their slope.
The bowed outward shape of the PPF, thus, indicates that resources are not perfectly adaptable for producing different goods and that as the production of one good increases, the opportunity cost of producing additional units of that good grows.