Civil Engineering Reference
In-Depth Information
technology. In this example there is a fixed trade-off ratio. In practice, however,
some people are better suited to some subjects than others and the same thing can
be applied to resources. As a general rule, therefore, resources are rarely equally
adaptable to alternative projects.
In construction, or any other economic sector, it is rare to experience a constant
opportunity-cost ratio, in which each unit of production can be directly adapted to
an alternative use. It is far more usual in business trade-off decisions to see each
additional unit of production cost more in forgone alternatives than the previously
produced unit. This rule is formally referred to as the
law of increasing opportunity
costs
. This can be illustrated with the 'guns or butter' argument - this states
that, at any point in time, a nation can have either more military goods (guns) or
civilian goods (butter) - but not in equal proportions. For example, consider the
hypothetical position in which all resources in the first instance are devoted to
making civilian goods, and the production of military goods is zero. If we begin
production of military goods, at first production will increase relatively quickly, as
we might find some engineers who could easily produce military goods and their
productivity might be roughly the same in either sector. Eventually, however, as we
run out of talent, it may become necessary to transfer manual agricultural labour
used to harvesting potatoes to produce military goods - and their talents will be
relatively ill-suited to these new tasks. We may find it necessary to use fifty manual
labourers to obtain the same increment in military goods output that we achieved
when we hired one sophisticated engineer for the first units of military goods. Thus
the opportunity cost of an additional unit of military goods will be higher when we
use resources that are inappropriate to the task. By using poorly suited resources, the
cost increases as we attempt to produce more and more military goods and fewer
and fewer civilian goods.
The law of increasing opportunity costs is easier to explain using a
production
possibility curve
. Using these curves, it is possible to show the maximum amount
of output that can be produced from a fixed amount of resources. In
Figure 1.1
(see page 4) we show a hypothetical trade-off between units of military goods and
civilian goods produced per year. If no civilian goods are produced, all resources
would be used in the production of military goods and, at the other extreme, if no
military goods are produced, all resources would be used to produce civilian goods.
Points A and F in
Figure 1.1
represent these two extreme positions. Points B, C,
D and E represent various other combinations that are possible. If these points are
connected with a smooth curve, society's production possibilities curve is obtained,
and it demonstrates the trade-off between the production of military and civilian
goods. These trade-offs occur on the production possibility curve. The curve is
bowed outwards to reflect the law of increasing opportunity cost. If the trade-off
is equal, unit for unit, the curve would not bow out, it would simply be a straight
line. Other interesting observations arising from the production possibility curve are
shown by points G and H. Point G lies outside the production possibility curve and
is unattainable at the present point in time, but it does represent a target for the
future. Point H, on the other hand, lies inside the production possibility curve and is,
therefore, achievable, but it represents an inefficient use of available resources.
