Constant Opportunity Cost
The Fundamentals of Trade-offs and the PPC
Every decision to produce something comes with a cost: the value of the next best alternative we give up. This is called opportunity cost. Economists use a simple model, the Production Possibilities Curve (PPC), also known as the Production Possibilities Frontier (PPF)3, to illustrate this concept. It shows all the maximum possible combinations of two goods or services an economy can produce when all its resources are used fully and efficiently.
Imagine a simple economy that only makes pizzas and robots. The PPC would draw a line showing the maximum number of robots it can make for every possible number of pizzas, and vice versa. The shape of this curve tells a critical story about the nature of the trade-offs in that economy.
In a constant cost scenario, this ratio remains the same no matter where you are on the PPC.
Why a Straight Line Means Constant Cost
A straight-line PPC is the visual signature of constant opportunity cost. It implies that resources can move from producing one good to producing the other with perfect ease and without any loss in productivity. In other words, the resources (like workers, machines, land) are equally suited to making either good.
Let's use a classic example: a farmer with a field that can grow either corn or soybeans with equal productivity. Every acre of land is just as good for corn as it is for soybeans. If the farmer decides to switch 10 acres from soybeans to corn, the 100% of the yield from those 10 acres is transferred. The opportunity cost of more corn is a fixed amount of soybeans, and this trade-off doesn't change whether the farmer is already growing a lot of corn or very little.
| Combination | Bushels of Corn | Bushels of Soybeans | Opportunity Cost of 1 More Corn |
|---|---|---|---|
| A | 0 | 1000 | --- |
| B | 200 | 800 | 1 bushel of soybeans |
| C | 400 | 600 | 1 bushel of soybeans |
| D | 600 | 400 | 1 bushel of soybeans |
| E | 1000 | 0 | 1 bushel of soybeans |
In this table, moving from point A to B means gaining 200 corn by giving up 200 soybeans. The opportunity cost per corn is $200 / 200 = 1$ soybean. Notice this exact same trade-off (1 for 1) holds true all the way to point E. This constant ratio produces a straight line on a graph.
Contrast with the Curved PPC
Most real-world PPCs are bowed outward (concave to the origin). This shape represents increasing opportunity cost. Why does this happen? Because resources are not perfectly adaptable. The first resources you shift from making robots to pizzas might be your best cooks, who are great at making pizzas but lousy at building robots. The next resources you shift might be slightly less efficient, and so on. As you produce more and more of one good, you have to give up increasingly larger amounts of the other good.
The curved PPC reflects the law of diminishing returns and resource specialization. The straight-line PPC, in contrast, assumes no specialization and perfect adaptability, which is a simplification but useful for understanding basic trade-off principles.
Real-World Applications and Simplified Examples
While perfectly constant opportunity cost is rare in complex national economies, it is an excellent model for many simpler, practical decisions.
Example 1: A Student's Time Budget
A student has 10 hours to divide between studying Math and studying History. Assume each hour is equally productive for either subject. The PPC is a straight line. The opportunity cost of 1 more hour of Math is always 1 hour of History, and vice versa.
Example 2: A Factory with Identical Machines
A factory owns 50 identical machines that can make either chairs or tables with the same speed and skill. If each machine can make either 2 chairs or 1 table per hour, the trade-off is constant. The opportunity cost of 1 table is always 2 chairs, represented by a straight-line PPC with a slope of $-2$.
Example 3: International Trade Theory
In basic models of trade (like the Ricardian model), countries are often assumed to have constant opportunity costs in production. This simplification makes it easier to see the pure benefits of specialization and trade. If Country A can always trade 1 ton of wheat for 2 tons of steel with Country B, they face a constant cost scenario in the global market.
Important Questions
Yes, that's exactly what the straight line implies within the model. It assumes resources are perfectly adaptable and equally productive in making either good. There is no loss of efficiency or productivity when moving resources from one industry to the other. This is why the trade-off (opportunity cost) remains constant at every point.
A curved (bowed-out) PPC is far more common in the real world. This is because resources (workers, land, machines) are usually specialized. A skilled software engineer cannot instantly become as productive a farmer, and farmland good for grapes may not be good for wheat. This specialization leads to increasing opportunity costs, which creates the curved PPC. The straight-line model is a useful simplification for teaching core concepts and applies well to specific, limited scenarios.
The slope of a straight-line PPC is constant and numerically equals the opportunity cost of the good on the horizontal axis. If the PPC shows Robots (vertical axis) vs. Pizzas (horizontal axis), the slope is calculated as Rise/Run = (Change in Robots) / (Change in Pizzas). A slope of $-3$ means that for every 1 additional pizza produced, the economy must give up producing 3 robots. Because it's a straight line, this slope (-3) is the same between any two points.
Footnote
1 Constant Opportunity Cost: A situation where the amount of one good that must be given up to obtain an additional unit of another good remains the same, regardless of how much of each good is already being produced.
2 Production Possibilities Curve (PPC): A graphical model that shows the maximum combination of two goods an economy can produce given its available resources and technology. Also known as the Production Possibilities Frontier (PPF).
3 Production Possibilities Frontier (PPF): Another term for the Production Possibilities Curve (PPC). "Frontier" emphasizes that it represents the limit of what is possible with full and efficient resource use.