Law of Increasing Opportunity Costs

Definition

The law of increasing opportunity costs states that as more of a good is produced, the opportunity cost of producing an additional unit of that good increases. This principle is a fundamental concept in economics that relates to the shape of the production possibilities frontier.

5 Must Know Facts For Your Next Test

1. The law of increasing opportunity costs explains the typically bowed-out shape of the production possibilities frontier.
2. As more of one good is produced, the opportunity cost of producing an additional unit of that good increases because resources must be diverted from the production of the other good.
3. The law of increasing opportunity costs is a result of the varying productivity of resources when applied to the production of different goods.
4. The law of increasing opportunity costs implies that to increase production of one good, the economy must sacrifice more and more of the other good.
5. The law of increasing opportunity costs is a key principle that underlies the concept of social choices and the trade-offs faced by an economy.

Review Questions

• Explain how the law of increasing opportunity costs relates to the shape of the production possibilities frontier.
  • The law of increasing opportunity costs is a fundamental principle that explains the typically bowed-out, or concave, shape of the production possibilities frontier. As more of one good is produced, the opportunity cost of producing an additional unit of that good increases because resources must be diverted from the production of the other good. This results in the PPF having a steeper slope at higher levels of production for one good, reflecting the increasing opportunity cost of producing that good.
• Describe how the law of increasing opportunity costs influences the social choices faced by an economy.
  • The law of increasing opportunity costs is a key concept that underlies the social choices faced by an economy. As an economy attempts to produce more of one good, it must sacrifice increasing amounts of the other good due to the increasing opportunity cost. This means that the economy faces trade-offs in its production decisions and must carefully consider the opportunity costs of producing additional units of each good. The law of increasing opportunity costs thus shapes the social choices available to an economy and the decisions it must make regarding the allocation of its scarce resources.
• Analyze how the varying productivity of resources contributes to the law of increasing opportunity costs.
  • The law of increasing opportunity costs arises from the varying productivity of resources when applied to the production of different goods. As an economy devotes more resources to the production of one good, the marginal productivity of those resources for that good decreases. This means that the economy must sacrifice increasingly more of the other good to produce an additional unit of the first good, resulting in the increasing opportunity cost. The uneven distribution of resources and their differing efficiencies in the production of various goods is a key driver of the law of increasing opportunity costs and the shape of the production possibilities frontier.

Related terms

Production Possibilities Frontier (PPF): The PPF is a graphical representation of the maximum combination of two goods that an economy can produce given its limited resources and technology.

Opportunity Cost:

The opportunity cost of an action is the value of the next best alternative that must be forgone in order to undertake that action.

Scarcity:

Scarcity is the fundamental economic problem that arises from the fact that resources are limited, while human wants are unlimited.