Oppertunity Costs

In today’s society, economic decisions made involve the concept of scarcity.

There are “opportunity costs” associated with any choice that you make. In order for an

economy to produce more of one type of product, it will be forced to sacrifice units of

production of another product. The shifting of resources from the production of one good

to another involves increasing sacrifices of the first good in order to generate an equal

increase of the second good. This is known as the “law of increasing opportunity costs.”

The economic rational for the law of increasing opportunity costs is that economic

resources are not completely adaptable to alternative uses. The opportunity cost of

producing a product tends to increase as more of it is produced because resources less

suitable to its production must be employed. Prices are a measure of opportunity cost

because they provide information about the value of one product in relation to another.

The shape of the Productions Possibility Frontier, (PPF), illustrates the principle of increasing opportunity costs (Graph 3). As more of one product is produced, increasingly larger amounts of the other product must be given up. In Graph 3, some factors of production are suited for producing both Product A and Product B, but as the production of one of the other brands increases, resources better suited to production of the other must be diverted. Producers of product A are not necessarily efficient producers of product B and just the opposite, so the opportunity cost increases as one moves toward either extreme on the curve of the production possibility frontier. If two products are very similar to one another, the production possibility frontier may be

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shaped more like a straight line (Graph 2). As an example, let’s say that two brands of wine are produced, Brand A and Brand B. These two brands of wine use the same grapes and the production process is the same. The only thing that is different is the name on the label. The same factors of production can produce either brand equally efficiently. If an increase in production of Brand B goes from 0 to 3 bottles, the production of Brand A must be decreased by 3 bottles. In this case, the two products are almost identical and can be produced equally efficiently using the same resources. The opportunity cost of producing one over the other remain constant between the two extremes

of the production possibilities. The difference in increasing constant opportunity costs is that constant opportunity costs change at the same rate of increase or decrease, because the products are similar. Increasing opportunity costs change at different rates of increase or decrease because Product A’s producer is not efficient in producing Product B and visa versa.

The Production Possibilities Frontier is all the combinations of two goods that can or can’t be produced. The PPF helps to explain and show how opportunity costs work. The law of increasing opportunity cost explains why the Production Possibility Curve, (PPC) is concave from the origin. A “bowed out” curve shows that resources in production are not equally efficient in producing every good. This slope of the PPC is a graphical way of showing that to produce more of one product we must do with less of another. “Opportunity cost” is that cost or item that you must give up or do with less of that item. Points outside the PPF are not common but can be

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achieved with specialization and international trade. One of the things the production possibility curve shows us is product efficiency. Along the curve we see the maximum output that can be obtained given the available inputs. Points inside the