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.
- 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.
- 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.
- As
more sheds are produced, the opportunity cost of production increases.