## Thursday, September 26, 2013

### The Law of Increasing Opportunity Cost

The law of increasing opportunity cost states that the opportunity cost of a good rises as more of the good is produced.

Example:

As we go down the table, butter production increases by a constant 100 tons in each new row. But notice
that gun production falls by larger and larger amounts each time butter production increases by 100 tons.

For example, moving from  point A to point B along the PPF, butter production rises by 100 tons, and gun production falls by 100, from 1,000 to 900. So the opportunity cost of the first 100 tons of butter is 100 guns. the if we move from row B to row C,then the butter production again rises by 100 tons, gun production falls by 150, from 900 to 750. So the opportunity cost of the second 100 tons of butter is 150 guns.

As you continue down the rows, the opportunity cost of an additional 100 tons of butter continually increases. The more butter we produce, the greater the opportunity cost of producing  more butter.

Now we apply this law ,Suppose a country begins at point A, where it produces only guns but no butter. At point A, all of the country’s resources are used to make guns. Even those resources that would be much more useful for making butter, such as farmers and their equipment, are employed in gun production.Now suppose the country decides to produce butter, too. To make its first 100 tons of butter, moving from A to B, the country will have to shift resources out of gun production and into butter production.

To make as much as possible of both goods, it will shift those resources that are the most useful for making butter and the least useful for making guns,those farmers and barns and milking machines. Gun production
will not fall much, because the resources taken away were not doing a lot of good in gun production anyway. So the opportunity cost of the fi rst 100 tons of butter is only 100 guns.

Now suppose the country wants to produce an additional 100 tons of butter, moving from point B to point C. This time, the country will have to shift some resources that are better suited for making guns and less suited for making butter— Shifting away these resources will cause gun production to fall by even more than before. This is why, as the figure shows, the opportunity cost of moving from point B to point C is 150
guns, which is higher than the opportunity cost of moving from point A to point B. So  the more butter the country is already producing, the greater the opportunity cost of producing more butter.

An economy must choose where to operate among the many possible points on its current production possibilities frontier. That is, a country must decide how much food and how much other stuff to make.
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