What Is Law of Increasing Opportunity Cost?
iThe law of increasing opportunity cost is an economic theory that states that opportunity cost increases as the quantity of a good produced increases. Investopedia defines opportunity cost as the cost of an action not taken in order to pursue a particular course of action.
Producers faced with limited resources must choose between various production scenarios. In a market with only two goods, x and y, there are three possible options: produce all x and no y; produce all y and no x; or produce some x and some y. These options are illustrated by the production possibilities schedule, according to AmosWEB.
The cost of options not taken is the opportunity cost. As production of a given good increases, opportunity cost increases because of resource variability. Resource variability is the idea that all inputs are not equal; some are better for producing certain goods than they are for producing other goods. So, as more of an input that is better for producing x than y goes into the production of y, opportunity cost rises, production efficiency decreases and price increases.
The law of increasing opportunity cost is fundamental to the law of supply. The law of supply states that as the price of a good increases, the quantity of that good supplied increases. Thus, increasing opportunity cost results in increased price and increased supply.