What is the difference between deductive and inductive methods in economics when discussing theories?

8 August 2016

Inductive methods in economics starts from the gathering of facts and data before forming a theory based on the results gathered. However, a deductive method begins with general theories and principles about economics, generating a hypothesis before testing them, a reverse of inductive methods in economics when discussing theories. 9. # Briefly outline the law of increasing opportunity costs. Use a production possibility curve to illustrate your answer.

The law of increasing opportunity cost states that as you produce more of one type of good, the opportunity cost of producing it increases. This is due to the assumption that there are increasing costs for using resources which are better suited at producing another good. For example, taking a worker who is better suited at making cars would not be as productive in baking cakes, hence there would be an increase in costs. Assuming a economy that has a fixed quantity of productive resources and technology, which only produces 2 types of goods, cars and cakes.

Assuming if all resources are allocated to producing cars, 2000 cars can be produced, and if all resources into producing cakes, 4000 cakes can be produced. With the use of the production possibility curve, the graph below would be able to show the concept of choice and opportunity cost. As seen from the graph above, the shape production possibility curve is concave, bowing outwards due to the law of increasing opportunity costs.

As we can see from point A to B, the opportunity cost of producing 1000 more cakes is 400 cars. However, from Point B to C, the opportunity cost of producing an additional 1000 cakes is 600 cars. This shows graphically the law of increasing opportunity costs due to the assumption that by taking resources which are better at producing another good, (Cars to Cake), these resources are not as productive hence leading the increased production costs.

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