EV-Battery Plants and the Law of Increasing Opportunity Cost

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 from some other productive activity (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. After excerpts from the article, there is a numerical example.

This article is an example. See First Big U.S. EV-Battery Plant Offers Lessons as Industry Springs Up: Tesla partner Panasonic describes challenges on path to profitability as federal subsidies attract newcomers by River Davis of The WSJ. Excerpts:

"People at Panasonic and industry consultants say the early efforts at building EV batteries in the U.S. have shown the ways companies can go astray. One of the biggest issues is training workers in the finicky art of battery making, where the slightest exposure to moisture might mean a whole batch has to be thrown out. 

Also, equipment can’t necessarily be shipped from Asia and plopped onto an American assembly line, given U.S. safety regulations and different operating conditions, while equipment customized for the U.S. is in short supply. Consultants say when auto makers and battery makers try to build batteries jointly, careful planning at the outset is needed to prevent squabbling and missed deadlines."

"The company was surprised to find that American workers’ hands were sometimes too big to efficiently operate machinery made in Asia, he said. “It sounds like a joke, but these kinds of issues were frequently encountered in the early stages.”

Boosting production took a year or two more than expected because of issues such as training workers without battery experience and adapting equipment and production processes to them, he said."

Like I said above, this EV battery case had additional costs that are only there since we are trying to expand production so quickly. 

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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.