Increasing opportunity costs affect the shape of the production possibilities curve (PPC) by making it concave (bowed-out) from the origin. The PPC represents the maximum combination of two goods that an economy can produce given its resources and technology. When opportunity costs increase, it means that to produce more of one good, the economy must give up an increasing amount of the other good.
Let's illustrate this concept with an example of a hypothetical economy that produces only two goods: smartphones (S) and laptops (L). The table below shows different production possibilities for smartphones and laptops:
Combination Smartphones (S) Laptops (L)
A 10 30
B 15 26
C 20 18
D 23 8
E 25 0
In this graph, the x-axis represents the quantity of smartphones (S), and the y-axis represents the quantity of laptops (L).
As we move from point A to point E along the curve, the economy is shifting resources from laptop production to smartphone production. At the beginning (point A to B), the opportunity cost of producing more smartphones is relatively low, as the economy can reallocate some resources without sacrificing many laptops. However, as the economy moves from point B to C and C to D, the opportunity cost of producing additional smartphones increases significantly. The economy needs to give up more and more laptops to produce a few extra smartphones.
This increasing opportunity cost is reflected in the bowed-out shape of the PPC. As the economy moves along the curve, it encounters diminishing returns. This means that producing more of one good requires giving up larger and larger quantities of the other good.
In this example, the increasing opportunity costs are caused by the limited availability of resources and technology. The economy's resources might be better suited to producing laptops at the beginning, but as more smartphones are produced, the economy starts to allocate less suitable resources to smartphone production, resulting in decreasing efficiency and increasing opportunity costs.
Overall, the bowed-out shape of the production possibilities curve illustrates the concept of increasing opportunity costs, where the trade-offs between producing two goods become more significant as the economy moves along the curve.