Law of Increasing Opportunity Cost

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What Is Law of Increasing Opportunity Cost?

The law of increasing opportunity cost states that as an economy produces more of one good, the opportunity cost of each additional unit of that good rises. The reason is that resources are not equally well suited to producing every good. As production of one good expands, producers must draw in resources that are increasingly ill-suited to it and increasingly valuable in their alternative use, so each additional unit costs more in terms of the good given up. This law is why a production possibilities frontier is typically drawn bowed outward, or concave to the origin, rather than as a straight line.

Why It Matters

The law of increasing opportunity cost gives the production possibilities frontier its characteristic curved shape and explains why economies rarely specialize completely in a single good. Because shifting resources becomes progressively more costly, the trade-off between two goods worsens as production tilts toward one of them: the first units are cheap to produce, later units expensive. A straight-line PPF, by contrast, would imply constant opportunity cost, meaning resources are equally adaptable to either good, which is uncommon in practice. Understanding the law helps students read a PPF's slope correctly and see why the marginal cost of production tends to rise, a pattern that also underlies upward-sloping supply curves.