Economic Rationale

What is the economic rationale for the law of increasing opportunity costs? Why does the sacrifice of robots increase as we produce more pizzas? The answer is that resources are not com letely ada table to alternative uses. Many resources are better at producing one good than at producing others. Fertile farmland is highly suited to producing the ingredients needed to make pizzas, while land rich in mineral deposits is highly suited to producing the materials needed to make robots. As we step up pizza production, resources that are less and less adaptable to making pizzas must be "pushed" into pizza production. If we start at A and move to B, we can shift the resources whose productivity of pizzas is greatest in relation to their productivity of robots. But as we move from B to C, C to D, and so on, resources highly productive of pizzas become increasingly scarce. To get more pizzas, resources whose productivity of robots is great in relation to their productivity of pizzas will be needed. It will take more and more of such resources, and hence greater sacrifices of robots, to achieve each increase of 1 unit in the production of pizzas. This lack of perfect flexibility, or interchangeablility, on the part of resources is the cause of increasing opportunity costs. (Key Question 6)

Allocative Efficiency Revisited

So far, we have assumed full employment and productive efficiency, both of which are necessary to realize any oint on an economy's production possibilities curve. We now turn to allocative efficiency, which requires that the economy produce at the most valued, or optimal, point on the production possibilities curve. Of all the attainable combinations of pizzas and robots on the curve in Figure 2-1, which is best? That is, what specific quantities of resources should be allocated to pizzas and what specific quantities to robots in order to maximize satisfaction?

Our discussion of the economic ers ective in Chapter 1 puts us on the right track. Recall that economic decisions centre on comparisons of marginal benefits and marginal costs. Any economic activity—for example, production or consumption— should be expanded as long as marginal benefit exceeds marginal cost and should be reduced if marginal cost exceeds marginal benefit. The optimal amount of the activity occurs where MB = MC.

Consider pizzas. We already know from the law of increasing opportunity costs that the marginal cost (MC) of additional units of pizzas will rise as more units are chapter two • the economic probLem: scarcity, wants, and choices

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  • benilde
    What is the economic rationale for the law of increasing opportunity cost?
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