Economics Production Possibility Frontier Questions Long
The law of decreasing opportunity cost states that as the production of one good increases, the opportunity cost of producing an additional unit of that good will also increase. In other words, the more resources are allocated to the production of a particular good, the less efficient the production becomes, resulting in a higher opportunity cost.
This law is closely related to the Production Possibility Frontier (PPF). The PPF is a graphical representation of the maximum combination of goods and services that an economy can produce given its available resources and technology. It shows the trade-off between producing different goods and services.
The PPF is typically concave (bowed out) due to the law of decreasing opportunity cost. This means that as an economy moves from producing more of one good to producing more of another good, the opportunity cost of producing the second good increases. This is because resources are not perfectly adaptable and specialized, and as more resources are allocated to the production of one good, the opportunity cost of producing the other good increases.
For example, let's consider an economy that can produce two goods: cars and computers. Initially, when the economy is producing mostly cars, it can easily reallocate some resources to produce more computers without sacrificing too many cars. However, as the economy starts to produce more computers and fewer cars, it becomes increasingly difficult to reallocate resources from car production to computer production. This is because the resources that are best suited for car production have already been utilized, and reallocating them to computer production would result in a significant decrease in car output.
As a result, the opportunity cost of producing additional computers increases as the economy moves along the PPF. This is reflected in the concave shape of the PPF, where the slope becomes steeper as we move from producing more of one good to producing more of the other good.
In summary, the law of decreasing opportunity cost explains the relationship between the allocation of resources and the trade-off between producing different goods and services. It is closely related to the concave shape of the PPF, which illustrates the increasing opportunity cost of producing one good as more resources are allocated to the production of another good.