What does the term 'law of increasing opportunity costs' assert about resource allocation?

The law of increasing opportunity costs asserts that as resources are shifted from the production of one good to another, the cost of producing additional units of the second good increases. This phenomenon occurs because resources are not perfectly adaptable to the production of all goods.

For example, consider a scenario where a country produces both agricultural products and machinery. Initially, when reallocating resources from agriculture to machinery, the opportunity cost—what is given up in terms of agriculture—may be relatively low. However, as more resources are diverted, less efficient resources may need to be used for machinery production, leading to a greater sacrifice of agricultural output for each additional unit of machinery produced. This illustrates how increasing opportunity costs arise as resources are reallocated in production.

The concept emphasizes that resources have specific efficiencies in different uses, and using them in less efficient ways leads to higher costs. Therefore, the understanding of this principle is crucial for making informed decisions about resource allocation in economics.