Hand sanitizer and the law of increasing opportunity cost

This is based on a WSJ article from last March. Rapidly increasing production of a certain good in a short period of time leads to increasing opportunity costs as less capable resources have to be switched over (capital has to be re-tooled and workers retrained). All of that adds costs that were not there before. So it actually costs more to produce additional units, on average.

See One Company’s Hands-On Effort to Ramp Up Sanitizer Production: Inside the push at EO Products to quadruple its output—without raising prices by Sharon Terlep of The WSJ. Excerpts:

"EO Products, a Bay Area maker of bath and body products, has quadrupled production of its high-end hand sanitizer. It is running extra shifts, speeding up lines, hiring temporary workers and converting factory lines designed for other products to make hand sanitizer instead."

"At one point last month, one of the company’s suppliers ran out of the aluminum-like seals that go on hand-sanitizer gel bottles and are roughly the size of the tip of a pinkie finger. Federal regulations require stringent testing of any replacement seal, so there was no quick answer."

"Purell parent company Gojo Industries Inc. is rationing sales to stores to protect supply for hospitals and other businesses."

"the state of New York has prison inmates making sanitizer to bolster supply."

"U.S. hand-sanitizer sales were up more than 470% for the week ended March 7, compared with the year-earlier period."

"Neither hand sanitizer nor soap is among the most profitable products for the company, so the switch-over will drag on margins. But the company hasn’t raised prices and isn’t considering doing so. 

“Raising prices at this time would not be in alignment with our core values,” Mr. Feegel said. “All the business rules about profitability are off the table.”"

"the company had to cap online sales as some retailers have turned to the company’s website to restock store shelves."

"So many callers have special circumstances that Ms. Jones implemented a strict rule against making exceptions to ship products to customers. Staffers broke the rule once and sent a bottle from their office supplies to a caller in a particularly dire situation, she said."

"Ramping up demand for hand sanitizer, in particular, is challenging because it is regulated by the Food and Drug Administration as an over-the-counter product and must meet the agency’s safety and efficacy standards."

"All the company’s hand sanitizer is currently made at its own factory, but it plans to hire private-label manufacturers to make the products using its formula, specifications and rules around employee pay and sustainability."

Related posts:

Flushing out the true cause of the global toilet paper shortage amid coronavirus pandemic 

Ventilators and the law of increasing opportunity cost

Here are some basic terms that economists use to discuss this issue:

Opportunity Cost-The value of the best foregone alternative. There is no such thing as a free lunch. If we want to build one more skyscraper, we may have to give up one submarine, since there may not be enough steel to go around (steel is scarce!).

The law of increasing opportunity cost-As more of a particular good is produced, the opportunity cost of its production rises. Why is the law of increasing opportunity cost true? Different resources are better suited to different productive activities. This is just about the same as saying people have different abilities, like some are more entrepreneurial and some are more bureaucratic.

Let’s assume that we have society with five workers who can make either of two goods, candles or shoes. Now the best candle maker will not necessarily be the best shoemaker and some candle makers will be better than others. This simply means that workers have different abilities.

In the real world, the best doctor would not be the best lawyer. Some plumbers are better than others.

In the table below, the number of candles OR shoes that each worker can make in a day is listed.

Worker	Candles	Shoes
I	7	3
II	6	4
III	5	5
IV	4	6
V	3	7

Again, the workers have different abilities, just as they do in the real world.

What are all of the combinations of candles and shoes that this society can make? If all the workers make candles, they can make 25 (just add up how much each worker can make). How many shoes? ZERO, since each worker spends all day in the candle factory (this is combination A in the table below).

If we want to make some shoes, the first worker we would tell to stop making candles, if we are rational and trying to get the best deal, would be worker V.  So we gain 7 shoes and lose 3 candles. That is why combination A is 22 and 7. Worker V no longer makes candles since they are making shoes. So the opportunity cost of making a shoe is some number of candles (and vice-versa).

The rest of the combinations that show what would happen if we kept moving workers out of candle making and into shoe making is in the table below.

Combination	Candles	Shoes
A	25	0
B	22	7
C	18	13
D	13	18
E	7	22
F	0	25

Now what happens to the opportunity cost as we move from combination A to combination B? Then combination B to combination C, and so on? The table below shows this:

Change	Candles Given Up	Shoes Gained	Candles per Shoe
A to B	3	7	0.429
B to C	4	6	0.667
C to D	5	5	1.000
D to E	6	4	1.500
E to F	7	3	2.333

By moving from point A to point B, we give up 3 candles to gain 7 shoes. The cost of each shoe in candles is .429 (3/7). Then we give up 4 candles to get 6 shoes, with each shoe costing .667 candles. The more shoes we try to produce, the more candles that have to be given up to get each shoe. So the opportunity cost of producing shoes rises.

This is called the law of increasing opportunity cost.

The law of increasing opportunity cost-As more of a particular good is produced, the opportunity cost of its production rises. (see how the numbers rise in the “Candles per Shoe” column in the table above)

Why is the law of increasing opportunity cost true? Different resources are better suited to different productive activities. This is just about the same as saying people have different abilities, which is what we see in the number of candles and shoes each worker can make.