Question

Explain the law of increasing opportunity cost with the aid of a PPF diagram.

Answer 1

Law of increasing Opportunity Costs Defined:-

Opportunity cost is the cost of what you are giving up to do what we are presently doing.

The law of increasing opportunity costs presents that as we grow production of one good, the opportunity cost to produce added good will increase.

The law is best explained with a graphical portrayal of the production possibility frontier, also known as PPF. The PPF is a graph presents all combinations of two goods that can be produced givent the accessible resources. Let's take an example, we assume that we can produce either baseballs or puzzles. The following diagram shows the combinations of baseballs and puzzels we can make given our resources.

Graph-1

If we only produce baseballs, we can make 60. If we only produce puzzles, we can produce 40. Let's assume we start with producing all baseballs. When making all baseballs, there are some resources that would be more systematic if issued to producing the other good.

With each extra puzzle we produce, there is an opportunity cost of giving up baseballs. As the law of increasing opportunity cost, the cost of producing the extra puzzle grows.