Solved According To The Law Of Increasing Opportunity

according to the law of increasing opportunity costs,

Use the production possibilities curve to represent the alternative combinations of goods and services that an economy can produce. Make sure to understand how the curve represents efficient, inefficient, and unattainable levels of production. Pay attention to how economic growth can be represented by shifts in the curve. Also in this chapter, learn about how economic systems compare.

Explore how shifts in the economy lead to shifts in the production possibilities curve of a country using real-world examples. In economics, production possibilities allow us to visualize opportunity costs. Learn about the definition of opportunity costs of production, explore graphing costs through a model called a production possibilities chart, and consider what might happen upon moving the curve.

The answer is “Yes,” and the key lies in comparative advantage. An economy achieves a point on its production possibilities curve only if it allocates its factors of production on the basis of comparative advantage. Opportunity cost, as such, is an economic concept in economic theory which is used to maximise value through better decision-making. To understand this law, it is important to first define what is mean by opportunity cost itself. This is sometimes referred to as foregone production, meaning that, in order to choose one strategy or method of producing a good, resources must be diverted from producing other goods.

  • When specialization takes place according to comparative advantage, the trading individuals will both be better off.
  • We develop a partial equilibrium framework to assess the opportunity cost of domestic oil consumption for an oil-exporting country.
  • However, time spent chasing after an income might have health problems like in presenteeism where instead of taking a sick day one avoids it for a salary or to be seen as being active.
  • By implementing the first of many Five Year Plans, the Soviet leaders clearly chose to push for high economic growth rates through investment in heavy industry and military production.
  • As sunk costs have already been incurred, they remain unchanged and should not influence present or future actions or decisions regarding benefits and costs.

Opportunity cost exists even when you’re not spending money. If you assign an employee to straighten up the stockroom rather than help customers, that might cost you a few sales, since some customers might not be helped and will leave without buying anything. On the other hand, if you put her out on the sales floor and the stockroom remains a mess, you may lose other sales because your staff can’t locate the merchandise customers want to buy.

Difference Between Price & Marginal Revenue

The slope of Plant 1’s production possibilities curve measures the rate at which Alpine Sports must give up ski production to produce additional snowboards. Because the production possibilities curve for Plant 1 is linear, we can compute the slope between any two points on the curve and get the same result. Between points A and B, for example, the slope equals −2 pairs of skis/snowboard (equals −100 pairs of skis/50 snowboards).

Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling. Learn more about the Econ Lowdown Teacher Portal and watch a tutorial on how to use our online learning resources. Trade restrictions are often used to protect domestic companies from the threat of cheap foreign labor. Explore trade restrictions and their effect on job protection and infant industries.

Which Of The Following Describes The Law Of Increasing Opportunity Cost?

A hammer is a great tool for building houses, but has little use in developing a software program. Likewise, those with programming experience may do a great job computer programming, but lack construction skills. As Adam Smith outlined, each person seeking their own self interest in turn promotes the best interest of society by producing those goods and services most desired, all as if by an invisible hand. According to him, each individual, seeking only his own gain, “is led by an invisible hand to promote an end which was no part of his intention”–that end being the public interest. Opportunity cost is basically the benefit you forego in pursuing one path over the other. Sometimes a small cost in the form of time or money or entertainment could reap huge dividends in the future.

  • Anticipated and unanticipated inflation can have an effect on supply and demand.
  • It has two plants, Plant R and Plant S, at which it can produce these goods.
  • As we include more and more production units, the curve will become smoother and smoother.
  • The income statement reports profit of $12,000 for 20XX and the balance sheet on January 1, 20XX reports assets of $100,000 whereas the balance sheet on December 31, 20XX reports assets of $200,000.
  • Buying 1,000 shares of company A at $10 a share, for instance, represents a sunk cost of $10,000.
  • Some sectors are growing extensively from such costs, private or not.

The opportunity cost of the acquisition, on the other hand, was that the corporation spent $20,000 on things it could have spent that money on instead. The production possibilities frontier shows the maximum combination of two types of goods that can be produced using all resources. Also, I guess that the law of increasing opportunity cost is the opposite of economies of scale.

What Is A Simple Definition Of Opportunity Cost?

The business will net $2,000 in year 2 and $5,000 in all future years. A yield rate that after a certain point fails to increase proportionately to additional outlays of capital or investments of time and labor. Externalities are a kind of cost generated from one economic agent to another.

according to the law of increasing opportunity costs,

In drawing production possibilities curves for the economy, we shall generally assume they are smooth and “bowed out,” as in Panel . This curve depicts an entire economy that produces only skis and snowboards. The combined production possibilities curve for the firm’s three plants is shown in Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports”.

Which Is An Example Of An Opportunity Cost Increase?

With the economy currently producing 2000 cars, Jerry claims that the development of BGH allows the economy to produce more milk and more cars. Friday’s output per hour is shown by the PPC closest to the origin. Robinson’s PPC is greater than Fridays since he has an absolute advantage in producing both goods. If they don’t specialize, their joint production without specializing is represented by the PPC furthest from the origin. If a society loses resources, the production possibilities curve would shift in. The loss of resources may come about from war, natural disasters, such as earthquakes or hurricanes, or disease, such as AIDS. The view of capitalism is that markets function without government control, thus it does not need government intervention.

Product and cost curves are used to measure the relationship between innovation and increased production. Explore the definitions of these curves and learn how they are used in production possibility curves to help businesses maintain profitable production. Learn about trade and specialization and the benefits of this type of economic interaction. Understand according to the law of increasing opportunity costs, comparative advantage and how to calculate gains from trade. The law of diminishing marginal returns refers to the idea that the individual benefit of subsequent products or uses of a product decrease marginally over time. See how ‘enough is enough’, and calculate marginal returns using the curve to represent these decreases over time/uses.

The term Laissez-faire is French, essentially meaning leave it alone. Under capitalism, businesses have an incentive to always produce in the least cost manner. If they are not producing in the least cost manner, another business would be able to produce the product at a lower cost, undercut the competition, and take away sales.

This semester you can only have one elective and you want both basket-weaving and choir. You choose basket weaving and the opportunity cost is the enjoyment and value you would have received from choir. At the ice cream parlor, you have to choose between rocky road and strawberry.

What Is The Reason For The Law Of Increasing Opportunity Costs?

Two things could leave an economy operating at a point inside its production possibilities curve. First, the economy might fail to use fully the resources available to it. Second, it might not allocate resources on the basis of comparative advantage. In either case, production within the production possibilities curve implies the economy could improve its performance. At point A, the economy was producing SA units of security on the vertical axis—defense services and various forms of police protection—and OA units of other goods and services on the horizontal axis. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction.

according to the law of increasing opportunity costs,

The negative slope of the PPF illustrates the fact that larger quantities of cars correspond to a smaller amount of milk, and vice versa. This happens because all the economy’s resources are already in use, and therefore obtaining more cars would always require sacrificing some milk. In economic terms, the negative slope is due to the presence of opportunity cost. If Robinson spent an hour fishing instead of gathering coconuts, he would have to give up 6 coconuts to get 4 fish, so his marginal opportunity cost per additional fish is or 1.5 coconuts per fish. If instead he spent an hour gathering coconuts, he would give up 4 fish and gain 6 coconuts. Robinson’s marginal opportunity cost per coconut would be or two-thirds of a fish. Friday’s marginal opportunity cost of spending an hour fishing instead of gathering coconuts would be 2 coconuts for 3 fish or two thirds of a coconut per fish.


Firstly, the study perspective is critical since it determines which costs and effects to include in the evaluation.3 A societal perspective incorporates all the costs and benefits regardless of who incurs or obtains them. More restricted perspectives may mask the fact that costs are simply being shifted to another sector rather than being saved. Give an example of the law of increasing opportunity costs. Since Allan has a lower marginal opportunity cost for fishing compared to Ryan, he has a comparative advantage and should specialize in fishing . Ryan has a comparative advantage in gathering coconuts since he only gives up one fish while Allan must give up 2 fish per coconut. Let’s say that our class represented a country and we were going to produce houses and software programs.

However, the single biggest cost of greater airline security doesn’t involve money. It’s the opportunity cost of additional waiting time at the airport. According to the United States Department of Transportation, more than 800 million passengers took plane trips in the United States in 2012. Since the 9/11 hijackings, security screening has become more intensive, and consequently, the procedure takes longer than in the past.

Plant R has a comparative advantage in producing calculators. The production possibilities curve shown suggests an economy that can produce two goods, food and clothing. As a result of a failure to achieve full employment, the economy operates at a point such as B, producing FB units of food and CB units of clothing per period. Putting its factors of production to work allows a move to the production possibilities curve, to a point such as A. The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. Scarcity implies that a production possibilities curve is downward sloping; the law of increasing opportunity cost implies that it will be bowed out, or concave, in shape.