Scarcity of resources necessitates trade-offs, and trade-offs result in an opportunity costs. Any decision that involves a choice between two or more options has an opportunity cost.
The concept of ‘opportunity costs’ can be shown by using a Production Possibility Curve. The Production Possibility Curve depicts the best possible combinations of two or more goods an economy can produce using all of the available resources. It shows the trade-off between more of one good in terms of another. The law of increasing opportunity costs is reflected in the shape of the Production Possibility Curve. The curve is bowed out, which shows that when an economy wants to produce more of one product it must give up successively larger amounts of the other products it makes. The slope of the curve conveys the trade-off in terms of opportunity cost of producing one good rather than another.
Resources are not all the same. For example, if an economy was producing say motor vehicles and nuts, some of its resources will be better suited for producing motor vehicles while others are better suited for gathering nuts. Some people (resources) will be really good at gathering nuts, for example people who love to be outdoors instead of indoors, while others like to work inside on cars. In large economies if we started to withdraw resources from one product for another product, eventually we would reassign those whose opportunity costs are highest, which shows the general principle that when resources have different costs, we should always exploit the resource with the lowest opportunity cost first. This is called the ‘low hanging fruit principle’ which says when expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs.
Because resources are not equally productive in all possible uses, shifting resources from one use to another brings the law of increasing opportunity costs into play. The production of additional units of one product requires the sacrifice of increasing amounts of the other products so a society should first employ those resources that are relatively efficient at producing that good, only afterward turning to those that are less efficient.
Keywords: law of increasing opportunity costs, low hanging fruit principle, opportunity costs, production possiblity curve, scarity of resources, trade-offs
Comments
Good on 'ya mate! This is the kind of good work done by students that can help other students.
I still say sending someone out to pick up more nuts after they've all been gathered will cut down on car production for no account at all.
Nice job on the keywords, too, Joanne! Way to show us how its done.
"I still say sending someone out to pick up more nuts after they've all been gathered will cut down on car production for no account at all."...I am not sure what you mean by this Jack. Explanation would be good thanks!
Cheers
Jo
Sorry for not being clear. It was intended as a further example of just what you said about tradeoffs and reducing productivity from pouring more resources onto a project. Here goes.
Let's say you had 1,000 pecan trees scattered across the wilderness, and we think they produce an average of 100 pounds of nuts per tree per year, more some years than others. Squirrels take what they can, and it is hard to find them all, what with their being scattered about on the ground amongst leaves and rocks, and undergrowth. We sent out 100 folks the first day to gather nuts. They each came in with 300 pounds of nuts. The second day they had to walk a bit further to reach trees that they hadn't gathered at yet, and each came in with an average of 280 pounds of nuts. The third day they walked even deeper into the wilderness to reach trees that hadn't been harvested yet, and each came back with 260 pounds on average. The fourth day they reached the edge of the pecan wilderness, and came back with only 120 pounds of nuts each. The fifth day we sent them back to start over, and they came in with 10 pounds of nuts each, and they had gone back through the entire pecan wilderness. We can keep sending them out to gather nuts, but there just aren't any more nuts to gather. They should go help make cars now. That's all I was trying to say. Sorry for being so obscure.
I still like your description of the law of increasing costs, Jo.
If you are interested in more about the Production Possibilities Frontier, check out this cramlet: Supply and Demand: Production Possiblities Frontier which explores tradeoffs and output possibilities.