Economics: Michelle and James
Production and consumption in isolation
Potatoes:
200
80
Chicken:
50
40
Opportunity Cost Table
Potatoes:
Michelle
[200/50] = 4
James
[80/40] = 2
Chicken:
Michelle
[50/200] = 0.25
James
[40/80] = 0.5
Michelle’s opportunity costs
The opportunity of Michelle producing potatoes is the number of chicken she forgoes to produce the next sac of potatoes. Therefore, it's the marginal cost of producing a sac of potatoes in terms of chickens. Thus, Michelle’s opportunity cost of producing a sac of potatoes is 0.25 chickens.
The opportunity of Michelle producing chickens is the number of potato sacs she forgoes to produce the next chicken. Therefore, it's the marginal cost of producing chickens in terms of sacs of potatoes. Thus, Michelle’s opportunity cost of producing a chicken is 4 sacs of potatoes.
James’s opportunity costs
The opportunity of James producing potatoes is the number of chicken he forgoes to produce the next sac of potatoes. Therefore, it's the marginal cost of producing a sac of potatoes in terms of chickens. Thus, James’s opportunity cost of producing a sac of potatoes is 0.5 chickens.
The opportunity of James producing chickens is the number of potato sacs he forgoes to produce the next chicken. Therefore, it's the marginal cost of producing chickens in terms of sacs of potatoes. Thus, James’s opportunity cost of producing a chicken is 2 sacs of potatoes.
Absolute Advantage
Michelle has an absolute advantage in both the production of potatoes and chickens. Michelle can produce more potatoes and chicken than James can produce.
Comparative Advantage
Michelle has a comparative advantage in the production of chicken. Michelle has lower opportunity cost in producing chicken [0.25 compared to that of James of 0.5 sac of potatoes].
James has a comparative advantage in the production of potatoes. James has lower opportunity cost in producing potatoes [2 compared to that of Michelle of 4 chickens].
The outcome of specializing in area of comparative advantage, and then trading at a rate of 2.5 pounds of potatoes for 1 chicken:
Production with exchange
Total
Potatoes:
80
80*2.5 = 200
280
Chicken:
[50*2.5] = 125
0
125
Trade has increased the amount of chickens produced while the quantity of potatoes has remained the same. Thus, the production of both Michelle and James increases.
Consumption with exchange
Total
Potatoes:
80
200
280
Chicken:
69
56
125
James trades 56 chickens for 200 sacs of potatoes. The exchange has enabled both Michelle and James to consume at points that are beyond their production possibility frontiers.
The application of Comparative Advantage Theory
There are numerous benefits of specialization and exchange to businesses, society as a whole, and nations. The application of comparative advantage leads to an increase in total output, since business, society, and nations engage in activities in which they have the greatest advantage or which they have the least disadvantage.
