The Law of Rising Opportunity Cost states that as more units of a good are produced, the opportunity cost associated with that production will also increase. This concept can help companies determine whether increasing production is worth the effort.
The Law of Rising Opportunity Cost is a concept that is often employed in business and business circles. Essentially, this law states that as more units of a good are produced, the opportunity cost associated with that production will also increase. Understanding this phenomenon can help companies determine whether the choice to increase production is worth the effort, or if rising opportunity costs mean that the benefits of doing so are reduced enough to merit keeping production at a lower level.
To understand this law, it is important to first define what is meant by opportunity cost. This is sometimes referred to as discounted production, which means that in order to choose a strategy or method for producing a good, resources must be diverted from producing other goods. The opportunity cost is representative of what could be achieved by using those resources differently and how that use compares to the benefits ultimately generated by the selected option.
One way to understand how the rising opportunity cost law works is to consider a farmer who is deciding how to allocate farmland to growing two crops. Instead of allocating the available land equally between the two, the farmer chooses to plant 70% of the land in corn and reserve the rest for soybeans. Even though corn production is increased by allocating additional resources to that effort, this can drive up the cost of producing soybeans on the reduced amount of land due to the reduced yield of a firm that includes a number of of fixed expenses. At this point, the farmer will need to determine whether the benefits of harvesting more corn offset the higher costs of harvesting fewer soybeans, then adjust resource allocation if necessary to generate the most desirable end.
The general concept can be used in various ways. Companies can make use of it when planning production quotas of different products. Departments can use the idea while allocating resources to different projects. Even small businesses may consider the law of increasing opportunity costs when designing the displays and layout of a store’s shopping area or allocating time to certain types of back office functions. With this concept in mind, it is often much easier to come up with a plan of action that involves achieving maximum benefit while keeping losses in check.
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