The law of increasing opportunity costs exists because
not all resources are well-suited for all production.
all resources are well-suited for all production.
terms of trade are often different across regions.
of the difference between absolute advantage and comparative advantage.
The Correct Answer and Explanation is :
The correct answer is: not all resources are well-suited for all production.
Explanation (300 words):
The law of increasing opportunity costs states that as the production of one good increases, the opportunity cost of producing additional units of that good also increases. This economic principle arises because resources (such as land, labor, and capital) are not equally efficient or suitable for producing all goods.
In a real-world context, resources are often specialized. For example, farmland that is excellent for growing wheat may not be as productive for growing rice. Similarly, workers with skills suited for manufacturing machinery may not be as effective in software development. As a result, when an economy shifts resources from one good to another, it may initially allocate the most suitable resources. However, as production continues to expand, less suitable or less efficient resources must also be reallocated to the production of the good, resulting in a higher opportunity cost.
For instance, consider a country producing both consumer electronics and agricultural goods. If the country decides to produce more electronics, it might initially use engineers and high-tech facilities well-suited for this industry. However, as production increases, resources that are less suited for electronics (e.g., workers or land previously used for farming) must also be diverted. These resources are not as efficient in producing electronics, leading to increased costs per additional unit of production.
This principle helps explain the shape of the production possibilities frontier (PPF), which is typically bowed outward. The curve reflects increasing opportunity costs as resources are shifted between two types of goods. It highlights the importance of resource allocation efficiency and underscores the trade-offs inherent in economic decision-making.
In summary, the law of increasing opportunity costs exists because resources vary in their suitability for different types of production, leading to less efficient outcomes as specialization diminishes.