With constant opportunity costs, the ratio between costs and the number of units produced remains unchanged.
This is different from situations where opportunity costs decrease, such as when a producer can obtain discounts by ordering more raw materials to produce additional goods, which then leads to a lower and possibly higher unit cost of production profit per unit as the product is sold.
What Is Constant Opportunity Cost?
Constant opportunity costs occur when opportunity costs remain the same as you increase production of one good. This indicates that resources are easily adapted from the production of one good to the production of another good.
This term is often used to describe a production process in which the costs associated with producing goods and services remain the same, but still allow higher levels of production to be achieved.
Generally, this means that the cost of using additional resources to produce more goods does not reduce the cost per unit produced, nor does it increase the cost of producing each of those units.
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Constant Opportunity Cost PPC
A production possibilities curve (PPC) is a model that captures the scarcity and opportunity costs of a choice when faced with the possibility of producing two goods or services.
Points inside the checkpoint are ineffective, checkpoints are effective, and points outside the checkpoint are unreachable.
The opportunity cost of moving from one efficient combination of production to another efficient combination of production is how much of one good is given up to get more of the other.
The PPC form also gives us information about the technology of production (in other words, how resources are combined to produce these goods). The curved shape of the PPC in Figure 111 indicates rising opportunity costs of production.
We can also use the PPC model to illustrate the economic growth represented by the PPC shift. Figure 222 illustrates an agent that experienced economic growth.
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What Are The Laws Of Constant Opportunity Cost?
In reality, opportunity cost does not remain constant. As the law states, when you increase the production of one good, the opportunity cost of producing an additional good goes up.
- If Econ Isle switches from producing widgets to producing gadgets, it must give up more and more widgets in order to produce the same number of gadgets. In other words, the more gadgets Econ Isle decides to produce, the greater its opportunity cost in terms of widgets.
- If Econ Isle production were to move in the opposite direction, from all gadgets to all widgets, the law would still hold: as you increase production of one good, the opportunity cost of producing an additional good increases.
ALSO CHECK: DIFFERENTIAL COST ANALYSIS: Examples & Application to Businesses
Why Does Constant Opportunity Cost Occur?
Because resources are limited, every time you decide how to use them, you also give up other options. Economists use the term opportunity cost to indicate what must be given up to get what is desired.
A fundamental principle of economics is that every choice has an opportunity cost. If you sleep through your economics class (not recommended, by the way), the opportunity cost is the learning you’ve lost. Then if you spend your income on video games, you can’t spend it on movies.
If you choose to marry one person, you are giving up the opportunity to marry someone else. In short, opportunity costs are all around us.
The idea of opportunity cost is that the cost of one good is a lost opportunity to make or consume something else; In short, opportunity cost is the cost of the next best alternative.
Because people must choose, they inevitably face trade-offs when they have to give up what they want in order to get what they want more.
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PPF Constant Opportunity Cost
The production possibilities frontier can be derived in the variable-proportion case using the same labor and capital constraints as in the fixed-proportion case, but with one important adjustment.
Under variable proportions, unit demands are functions of the wage-to-rent ratio (w/r). This means that the ratios of capital to labor (which are the ratios of requirements per unit of factor) in each industry are also functions of the ratio of wages to rent.
If there is a shift in equilibrium (for some reason) so that the wage rate rises, then labor will become relatively more expensive relative to capital.
Firms would respond to this change by reducing their demand for labor and increasing their demand for capital. In other words, firms will replace labor with capital, and the capital-labor ratio will increase in every industry.
Such an adjustment will allow the firm to maintain the minimum production costs and, therefore, the maximum possible profit. This is the first important difference between variable and fixed proportions.
ALSO CHECK: What is Residual Income? Best Practices & What You Need
Conclusion
Although the general idea of constant opportunity cost is often used in a manufacturing environment. It can also be related to other types of business and financial situations.
For example, if a manager needs to fill a position in a department and is able to offer the position to an existing employee with the same level of experience and knowledge as the person who recently vacated the position, this will mean that the company will incur no additional costs in filling the position.
At the same time, if a job were offered to a new worker who lacked experience, it would mean committing additional resources to training the individual, which in turn would not keep the opportunity costs associated with the task at a constant level.
Constant Opportunity Cost FAQs
What Is Marginal Rate Of Transformation In Business Economics?
The marginal rate of transformation (MKT) is the amount of one good G that must be given up to free up the resources needed to produce an additional unit of the second good D.
What Is The Meaning Of Opportunity Cost?
Opportunity cost is the value of what is lost when choosing between two or more alternatives. When you make a decision, you believe that the option you choose will lead to the best results for you, regardless of any losses incurred. As an investor, opportunity cost means that your investment decisions will always result in losses or gains, both now and in the future.
Do Societal Decisions Have Impact On Opportunity Cost?
Opportunity costs also affect societal decisions. Universal health care would be nice, but the opportunity cost of such a solution would be less than housing, environmental protection, or national defence. These trade-offs also arise with government policy.
