What is the law of increasing opportunity cost?
The law of increasing opportunity cost says that as an economy produces more of one good, each extra unit costs more of the other good. It happens because resources are not equally suited to both goods, and it is why the production possibilities curve bows outward.
The law describes what happens as an economy shifts resources from one good to another. The first units of the new good are cheap in terms of what is given up, and each later unit costs more. Opportunity cost here is measured in units of the other good, so the law says the trade-off between the two goods gets worse the further the economy moves toward either one.
The cause is that resources are specialized. Workers, land, and machines are each better at some tasks than others. When an economy that makes only wheat starts making laptops, it first moves the resources that were least useful on farms and most useful in electronics, so it gives up little wheat. To keep raising laptop output, it has to pull in fertile farmland and experienced farmers who add little to laptop production, so each additional laptop costs much more wheat. That is the answer to why opportunity cost varies along a curve.
A four-row table shows the law in numbers. Point A: 0 laptops, 60 wheat. Point B: 10 laptops, 54 wheat. Point C: 20 laptops, 40 wheat. Point D: 30 laptops, 0 wheat. Moving from A to B gives up 6 wheat for 10 laptops, 0.6 wheat per laptop. Moving from B to C gives up 14 wheat for 10 laptops, 1.4 wheat per laptop. Moving from C to D gives up 40 wheat for 10 laptops, 4 wheat per laptop. The cost per laptop rises from 0.6 to 1.4 to 4, which is the law of increasing opportunity cost.
Plot those points with laptops on the horizontal axis and wheat on the vertical axis. The slope between each pair of points is the opportunity cost of a laptop, and it gets steeper from 0.6 to 1.4 to 4 as you move right. A curve that starts flat and gets steeper bends away from the origin, which is the bowed-out, or concave, production possibilities curve. If resources were equally good at both goods, each laptop would cost the same amount of wheat and the curve would be a straight line, the constant-cost case used in many comparative advantage problems.
On the AP exam, the law commonly appears in two ways: a table where you compute the cost per unit between rows and see it rise, or a bowed-out graph where you explain the shape. In both cases name the law, give the reason (resources are not perfectly adaptable between the two goods), and show the rising cost with numbers. Practice the per-unit arithmetic with the opportunity cost calculator, read about where a point on the PPC sits, and drag along the bowed curve on the PPC sandbox.
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Related questions
- Is a bowed-out PPC the same thing as the law of increasing opportunity cost?
- The bowed-out curve is the picture and the law is the idea behind it. A bowed-out, or concave, PPC gets steeper as you move along it, and that rising slope is the rising opportunity cost the law describes. Any graph that bows outward is showing the law at work.
- Does the law of increasing opportunity cost work in both directions?
- Yes. In the table above, moving back from D toward A, the economy gains 40 wheat for 10 laptops (0.25 laptops per unit of wheat), then 14 wheat for 10 laptops (about 0.71), then 6 wheat for 10 laptops (about 1.67). Wheat also gets more expensive the more of it the economy makes.
- Is the law of increasing opportunity cost the same as diminishing marginal returns?
- No, though both make costs rise. Diminishing marginal returns is about one firm adding a variable input, such as workers, to a fixed input in the short run. The law of increasing opportunity cost is about a whole economy moving specialized resources from one good to another. The [diminishing returns graph](/answers/what-does-diminishing-marginal-returns-look-like-on-a-graph) answer shows the first idea.