Question

explain fully the dufference between increasing opportunity cost and the law of diminishing returns

Answer 1

Increasing opportunity cost:- The law of increasing opportunity cost states that each time the same decision is made in resource allocation, the opportunity cost will increase. In economics, the law of increasing costs is a principle that states that once all factors of production (land, labor, capital) are at maximum output and efficiency, producing more will cost more than average. As production increases, the opportunity cost does as well. The best way to look at this is to review an example of an economy that only produces two things - cars and oranges. If all the resources of the economy are put into producing only oranges, there will not be any factors of production available to produce cars. So the result is an output of X number of oranges but 0 cars. The reverse is also true - if all the factors of production are used for the production of cars, 0 oranges will be produced. In between these two extremes are situations where some oranges and some cars are produced. There are three assumptions that are made in this possibility. The economy is experiencing full employment (everyone who wants to work has a job), the best technology is being used and production efficiency is being maximized. So the question becomes, what is the cost of producing more oranges or cars? If the economy is at the maximum for all inputs, then the cost of each unit will be more expensive. The economy will have to incur more variable costs, such as overtime, to produce the unit. To understand the law of increasing opportunity costs, let's first define opportunity costs. Opportunity cost is the cost of what you are giving up to do what you are currently doing. If you can either go to work or go to the beach, and you choose to work, the opportunity cost of working is the value you would have gotten had you gone to the beach.The law of increasing opportunity costs states that as you increase production of one good, the opportunity cost to produce an additional good will increase.The law is best explained along with a graphical representation of the production possibility frontier, also known as the PPF. The PPF is a graph showing all combinations of two goods that can be produced given the available resources. In this lesson, let's assume we can produce either baseballs or puzzles. The following PPF shows the combination of baseballs and puzzles we can make given our resources.

If we only make baseballs, we can make 60. If we only make puzzles, we can make 40. Let's assume we start with making all baseballs. When making all baseballs, there are some resources that would be more efficient if allocated to producing the other good. For example, if one person was really skilled at woodcarving but we were making all baseballs, that person would probably be more efficient making puzzles.So you start to move off the end point and make a combination of baseballs and puzzles. With each additional puzzle you make, there is an opportunity cost of giving up baseballs. As the law of increasing opportunity cost states, the cost of producing the additional puzzle increases as you move along the PPF.The first resources reallocated to making puzzles are those that were not well suited to make baseballs. However, as you continue to increase puzzle production, you start reallocating resources that were better at making baseballs than puzzles. Therefore, the cost to make one more puzzle is at the loss of more baseballs than with the first set of resources that were allocated.

law of diminising returns: In economics, diminishing returns is the decrease in the marginal  output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.The law of diminishing returns states that in all productive processes, adding more of one factor of production, while holding all others constant , will at some point yield lower incremental per-unit returns. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.The law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output. For example, a factory employs workers to manufacture its products, and, at some point, the company operates at an optimal level. With other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations. The law of diminishing marginal returns is also known as the law of diminishing returns, the principle of diminishing marginal productivity, and the law of variable proportions. This law affirms that the addition of a larger amount of one factor of production, ceteris paribus, inevitably yields decreased per-unit incremental returns. The law does not imply that the additional unit decreases total production, which is known as negative returns; however, this is commonly the result.

However, the two concepts are significantly different, as the law of diminishing returns refers to a decrease in production output as a result of an increase in only one input, while diseconomies of scale refer to an increase in cost per unit as a result of an increase in output.