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Law of increasing opportunity cost

SJ3 Elaine Yang

10th Sep 2020

Definition

Definition

The law of increasing opportunity cost states that when a company continues raising production its opportunity cost increases.

Specifically, if it raises production of one product, the opportunity cost of making the next unit rises.

Reason

Reason

This occurs because the producer reallocates resources to make that product.

Example 1.

Example 1

Explanation

Explanation

As what is shown on the image, when the number of workers who go to STOCK ROOM increases, the sales of SHOP will decrease, which means the opportunity cost rises.

Example 2

One way to understand how the law of increasing opportunity cost functions is to consider a farmer who is deciding how to allocate plats of farmland to the growth of two crops. Rather than allocating the available land equally between the two, the farmer chooses to plant 70% of the land in corn, and reserve the rest for soybeans. Even though the production of corn is increased thanks to the allocation of additional resources to that effort, this may cause the cost of producing soybeans on the reduced amount of land to go up, owing to the reduced return on a venture that includes a number of fixed expenses.

Example 2

Example 2

Explain

At this juncture, the farmer will need to determine if the benefits of raising more corn offsets the increased costs of raising fewer soybeans, then adjust the allocation of resources as necessary to generate the most desirable end.

Uses

The general concept can be used in a number of ways. Businesses can make use of it when planning production quotas of different products. Departments can use the idea when allocating resources to different projects. Even small businesses can take the law of increasing opportunity costs into consideration when designing the displays and layout of a store’s shopping area, or allocating time to certain types of back office functions.

Uses

Uses

By keeping this concept in mind, it is often much easier to arrive at a plan of action that provides for achieving the greatest benefit while keeping losses in check.

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