Increasing Opportunity Cost
The production possibility frontier (PPF) is a curve showing all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.
I will explain ‘the increasing opportunity cost’ on the production possibility frontier which is below.
The PPF is concave to the origin. It is because in order for producing a commodity more, it should be given up producing another commodity in an increasing amount.
Let's consider the point A on the figure (produced 28 mobile phones, 10 cameras). In order for producing 10 more cameras, it has to be given up 4 mobile phones. It is indicated point B on the figure.
When it is moved forward point C, it has to be given up 6 mobile phones in order for producing 10 more cameras.
On the point D, it has to be given up 8 mobile phones in order for producing 10 more cameras which are same quantity increasing on each point.
As it is seen on each point, in order for having output of 10 more cameras, it is sacrified mobile phones an increasing quantity on each point. This is called 'Increasing Opportunity Cost'.
Opportunity Cost
Needs of human being are infinite. But, goods and services produced in order for satisfying infinite human needs are always scarce. In other saying, there is an imbalance between the quantity of goods and services produced with the intent of satisfying infinite human needs and finite natural resources. It is defined as the Law of Scarcity.
Because it is not possible to satisfy infinite human needs with finite resources, satisfying of some needs are needed to be given up or delayed. At this point, the logic of opportunity cost comes up. Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action which is more beneficial.
An Example of Opportunity Cost?
Suppose you have 1 million dollars under-the-mattress saving. You have two options to use the money.
Option one: You can invest your money to deposit account with %10 annual percentage yield.
Option two: You can start your own business with %20 annual percent gain.
But, you don't have enough time and energy to start a new business. So, you are investing your money to deposit account with the %10 annual percentage yield. The opportunity cost of investing your money to deposit account is the %20 annual percent gain you could have got for starting a business.
