What is an example of the law of increasing opportunity cost?

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detroitted eNotes educator| Certified Educator

The question asks for an example which illustrates the law of increasing opportunity cost. The definition of this law (see citation below) is:

 “The economic reality of the increasing costs of production caused by the inefficiency of re-allocating specialized resources for the production of additional goods for which they are not well suited.”

In free markets, this situation should only occur when the most appropriate resources for some production process are fully utilized. At that point, if demand is sufficient, then the price for a good can be raised to the point that it becomes profitable to use less efficient resources to produce it. An example would be the diversion of scarce water resources from the Colorado River to irrigate poor quality desert land so as to make it sustain grass for golf courses in Las Vegas. Water is not efficiently used on desert land to grow grass, but because a sufficient price can be charged for golfing in Las Vegas, substantial water resources are diverted to support it. This also illustrates another aspect of opportunity cost, namely that, because many markets are geographically bounded, opportunity costs can be very local in nature. Another point to consider is that all cost structures are time-bound as well. That is, relative efficiency on the one hand and resource availability on the other, will both change over time.