Law Of Increasing Costs Flashcards, test questions and answers

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What is Law Of Increasing Costs?

The Law of Increasing Costs is an economic law that states that as production increases, total costs will eventually increase. This law applies to all types of production, including the production of goods and services. The Law of Increasing Costs is also known as the Law of Diminishing Returns, which states that after a certain point, increasing the amount of resources used in a given activity will result in diminishing returns (or higher costs).The Law of Increasing Costs is based on two fundamental economic principles: (1) scarcity and (2) opportunity cost. First, because resources are scarce and finite, it becomes increasingly difficult to find new ways to use them efficiently. As you increase the amount of resources used for a given activity, you have fewer resources available for other activities. This increases the opportunity cost associated with each additional resource – i.e., what else could have been done with those resources? Second, when you reach a point where additional inputs no longer yield sufficient returns relative to their cost – or diminishing returns – then it makes more sense from an efficiency standpoint to switch over to other activities or processes (for example, hiring workers instead of investing in new equipment). Because these two factors lead to rising costs over time as production increases, The Law Of Increasing Costs is often referred to as the law that never gets repealed due to its universal applicability across all forms and sizes of businesses. It serves as an important reminder that businesses must be mindful about how they allocate their resources in order remain competitive and profitable over time.