According To The Law Of Increasing Opportunity Costs

May 20, 2019 Bookkeeping

The law of increasing opportunity cost is a concept that is often employed in business and economic circles. Essentially, this law states ledger account that, as additional units of a good are manufactured, the opportunity cost associated with that production will also increase.

according to the law of increasing opportunity costs

The law of increasing opportunity cost is the concept that as you continue to increase production of one good, the opportunity cost of producing that next unit increases. This comes about as you reallocate resources to produce one good that was better suited to produce the original good. Therefore, the cost is losing more units of the original good https://business-accounting.net/ to produce one more of the new good. The law of increasing opportunity costs states that as production of a product increases, the cost to produce an additional unit of that product increases as well. The law of increasing opportunity costs says that, as we produce more of a particular good, the opportunity cost of producing that good increases.

How Is It Possible That Supply Increases With An Increase In Price?

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 contra asset account of cars, 0 oranges will be produced. In between these two extremes are situations where some oranges and some cars are produced.

according to the law of increasing opportunity costs

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 according to the law of increasing opportunity costs of the economy are put into producing only oranges, there will not be any factors of production available to produce cars.

What Is Law Of Increasing Opportunity Cost?

There are three assumptions that are made in this possibility. The economy is experiencing full employment , the best technology is being used and production efficiency is being maximized. So the question becomes, what is the cost according to the law of increasing opportunity costs 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.