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In today's society, economic decisions made involve the concept of scarcity.
There are "opportunity costs" associated with any choice that you make. In order for an
economy to produce more of one type of product, it will be forced to sacrifice units of
production of another product. The shifting of resources from the production of one good
to another involves increasing sacrifices of the first good in order to generate an equal
increase of the second good. This is known as the "law of increasing opportunity costs."
The economic rational for the law of increasing opportunity costs is that economic
resources are not completely adaptable to alternative uses. The opportunity cost of
producing a product tends to increase as more of it is produced because resources less
suitable to its production must be employed. Prices are a measure of opportunity cost
because they provide information about the value of one product in relation to another.
The shape of the Productions Possibility Frontier, (PPF), illustrates the principle of increasing opportunity costs (Graph 3). As more of one product is produced, increasingly larger amounts of the other product must be given up. In Graph 3, some factors of production are suited for producing both Product A and Product B, but as the production of one of the other brands increases, resources better suited to production of the other must be diverted. Producers of product A are not necessarily efficient producers of product B and just the opposite, so the opportunity cost increases as one moves towar ...