In all societies, for all people, resources are limited relative to people’s demands. Scarcity of resources is the primary reason we face trade-offs. However, as an economy grows, more resources become available and the trade-offs it faces change.

China is the world’s second largest economy, and it has been driving global growth for a decade. At the turn of the century, the average Chinese household spent around one third of its income on food. Since 2015, this proportion has declined to roughly 28 percent as the Chinese are increasingly moving toward the consumption of non-food products.

At the same time, the proportion of expenditure on housing in consumer income rose from 13.2 percent to 15.4 percent, health care spending from 10 percent to 11.3 percent, and communications and transport from 10.4 percent to almost 12 percent.

You can see that as an economy grows and consumer income increases, food becomes a smaller component of the budget. The change in the pattern of consumption has also had its mark on prices. As the Chinese economy is utilizing more inputs, the cost of each unit of output is becoming more expensive. In 2017, food inflation was much lower than non-food inflation, primarily due to the increase in expenditure on healthcare, communications, clothing, education, and entertainment. This also includes expenditure on additional commodities such as financial services and pets as domestic and foreign firms try to capitalize on the changes in the consumption patterns of the largest consumer market in the world.

Question

How does the change in the pattern of consumption expenditure in China relate to the law of increasing opportunity cost?