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18 September, 2021

Increasing Opportunity Cost

 The production possibilities schedule indicates that the opportunity cost of shed production increases as more sheds are produced. At the top of the schedule, the opportunity cost of the first shed is 5 dozen crab puffs. At the bottom of the schedule the opportunity cost of the tenth shed is 200 dozen crab puffs.

The reason for this pattern rests with the law of increasing opportunity cost, one of the more important principles studied in economics. The law of increasing opportunity cost states that the opportunity cost of producing a good increases as more of the good is produced.

The law of increasing opportunity cost results due to the third rule of inequality, which in this case means that all resources are not created equal.

 Increasing Cost:The production of the first shed, moving from bundle A to bundle B, uses resources best suited for shed production and least suited for crab puffs production. As such, very few crab puffs are given up to produce one shed.

  1. However, as more sheds are produced, resources that are removed from crab puffs production are more suited for crab puffs production and less suited for shed production.
  2. With production of the tenth shed, going from bundle J to bundle K, the resources switched are those least suited for sheds and best suited for crab puffs. As such, a relatively large number of crab puffs are given up to produce one shed.
  3. As more sheds are produced, the opportunity cost of production increases.