Question

What is meant by marginal opportunity cost? Why is it increasing in the case of production possibiltiy frontier?

Answer 1

provided as we walk through the explanation of the law to provide more clarity.

Law of Increasing Opportunity Costs Defined

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 costsstates that as you increase production of one good, the opportunity cost to produce an additional good will increase.

The Law in Practice

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.