Question

In the previous chapter, you learned about the law of increasing opportunity costs. What does this law have to do with an upward-sloping supply curve?

Short answer

The law of increasing opportunity costs is associated with the upward-sloping supply curve in that both concepts revolve around the idea that increased production leads to increased costs. More specifically, as a company expands production, resources that are less suited to production are utilized, leading to increasing opportunity costs, which in turn leads to a higher supply price: the core idea represented by an upward-sloping supply curve.

Step-by-step solution

Understanding the Law of Increasing Opportunity Costs

The law of increasing opportunity costs states that as production of a particular good or service increases, the opportunity cost of producing another unit of the same commodity also increases. This means that to produce more of one good, a larger amount of other goods must be sacrificed.

Understanding Upward-sloping Supply Curve

An upward-sloping supply curve illustrates that as the price of a product increases, suppliers are willing and able to sell more of it. The higher the price, the greater the quantity supplied.

Relating the Law of Increasing Opportunity Costs to an Upward-sloping Supply Curve

The law of increasing opportunity costs is reflected in the upward slope of the supply curve. As a company increases production, it tends to face rising costs and must therefore charge a higher price to supply additional units of a product. This is because resources are not perfectly adaptable to the production of all goods, and some resources are better suited to the production of certain products over others. As the production of a good expands, resources that are less and less suited to the production of the good are used, leading to increasing costs.