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    Increasing Opportunity Cost

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    LauKingWei
    The document discusses the law of increasing opportunity cost. It states that as a company increases production of one good, the opportunity cost of producing additional units of that good rises. This is because more resources must be reallocated from other goods. The document provides an example using the production of cars and motorcycles. It shows that as a economy produces more cars, it must reduce motorcycle production by greater amounts, meaning the opportunity cost of cars increases along the production possibility curve.

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    Increasing Opportunity Cost

    Uploaded by

    LauKingWei
    178 views3 pages
    The document discusses the law of increasing opportunity cost. It states that as a company increases production of one good, the opportunity cost of producing additional units of that good rises. This is because more resources must be reallocated from other goods. The document provides an example using the production of cars and motorcycles. It shows that as a economy produces more cars, it must reduce motorcycle production by greater amounts, meaning the opportunity cost of cars increases along the production possibility curve.

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    The document discusses the law of increasing opportunity cost. It states that as a company increases production of one good, the opportunity cost of producing additional units of that good rises. This is because more resources must be reallocated from other goods. The document provides an example using the production of cars and motorcycles. It shows that as a economy produces more cars, it must reduce motorcycle production by greater amounts, meaning the opportunity cost of cars increases along the production possibility curve.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    178 views3 pages

    Increasing Opportunity Cost

    Uploaded by

    LauKingWei
    The document discusses the law of increasing opportunity cost. It states that as a company increases production of one good, the opportunity cost of producing additional units of that good rises. This is because more resources must be reallocated from other goods. The document provides an example using the production of cars and motorcycles. It shows that as a economy produces more cars, it must reduce motorcycle production by greater amounts, meaning the opportunity cost of cars increases along the production possibility curve.

    Copyright:

    © All Rights Reserved
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    of 3

    13

    INCREASING OPPORTUNITY COST

    The law of increasing opportunity cost states that when a company continue raising
    production its opportunity cost increases. Specially, if it raises production of one product, the
    opportunity cost of making the next unit raises. This occurs because the producer reallocates
    resources to make that product. Example is car and motorcycle.

    Combination Car Motorcycle


    A 0 30

    + +1 -3
    B 1 27
    +
    C 2 + +1 21 -6
    s
    D 3 g +1 12 -9
    s
    E 4 d +1 0 -12
    f
    14

    Production Possibility Curve with Increasing Opportunity Cost

    35

    30 A
    B Production Possibility Curve
    25
    Motorcycle (units)

    20 C

    15

    D
    10

    0 E
    0 1 2 3 4
    Car(units)

    At point A, the economy produced 0 unit of car and 30 units of motorcycle . If the
    economy wishes to produce 1 unit of car, then the production of motorcycle decrease to 21
    units as shown by point B. This means that the opportunity cost is (30-27=3) units of
    motorcycles in order to produce 1 unit of car.

    If the economy wishes to increase 1 unit of car from 1 to 2 units. So, it can now only
    produce 7 units of motorcycles shown by point C. This means that the opportunity cost is
    (27-21=6) units of motorcycles.

    At point D, in order to increase another 1 more unit of car to 3 units from 2 units, the
    economy has to sacrifice (21-12=9) units of motorcycles. This means that the opportunity
    cost is 9 units of motorcycles.

    At point E, to increase another one more unit of car to 4 units from 3 , the economy has
    to sacrifice (12-0=12) units of motorcycles, which means that the opportunity cost is 12 units
    of motorcycles. Therefore, the production possibility curve displays a bowed-out shape due
    15

    toincreasing opportunity cost from 0 to 4 .The opportunity cost increases as production of one
    output increases.

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