OPPORTUNITY COST, SPECIALIZATION AND TRADE

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CHAPTER 2 OPPORTUNITY COST, SPECIALIZATION AND
TRADE Specialization and division of labor
increases output and create the need for
trade. Production possibilities curve shows
all combinations of maximum feasible amounts of
two goods that can be produced given a fixed
amount of resources and technology. Marginal
Opportunity Costs are given by the slopes along
the production possibilities curve. How much of
one good you must give up to obtain one more unit
of the other good.
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Income earned (in dollars)
(5)
16
(4)
12
(3)
8
(2)
4
(1)
Grade earned (in percent)
20
30
40
50
60
70
80
90
100
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Law of Increasing Costs As production of a good
increases, its marginal opportunity cost of that
good increases. Shown by a concave (or bowed
out) production possibilities curve. Unemployme
nt of resources (point F) and unattainable
combinations (point G). Production
possibilities curves can shift outward (increase)
as a result of - technology change - increase
in resources
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Figure 2.1
Production Possibilities Curve
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Figure 2.2
Shifting the Production Possibilities Frontier
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Current choices affect future production
possibilities curves. Greater use of current
resources to produce (invest in) capital goods
(including RD) leads to greater shift in future
production possibilities curves.
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Figure 2.3a
Growth Choices on the Production Possibilities
Curve
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Figure 2.3b
Growth Choices on the Production Possibilities
Curve
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Comparative Advantage Ability of an economic
agent to produce a given good at a lower marginal
opportunity cost than some other
agent. Absolute Advantage Ability of an
economic agent to produce more of a given good
than some other agent. With two goods and two
agents (e.g., countries), one may have an
absolute advantage over the other in the
production of both goods, but it can have a
comparative advantage over the other only in the
production of one good.
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PRINCIPLE If a comparative advantage exists
(i.e., if marginal opportunity costs differ),
then specialization and trade can increase total
combined output and the economic welfare of both
parties. That is, it allows parties to achieve
combinations that lie outside their respective
production possibilities curves. Terms of trade
rate at which two goods are exchanged. Must
fall between the marginal opportunity costs of
the two parties prior to trade. EXAMPLE
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Figure 2.4a
Canadas and Mexicos Production Possibilities
Curves
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Figure 2.4b
Canadas and Mexicos Production Possibilities
Curves
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Figure 2.5
The Trade Between Canada and Mexico
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Exchange Costs (Impediments to Trade)
opportunity costs of resources used in making
trades. Include Transaction Costs costs of
conducting a market exchange (time costs,
contracting costs, etc.). Skateboard
parks. Transportation Costs costs to move
products geographically. Artificial Barriers
to Trade tariffs, quotas, regulatory barriers,
etc.
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Net gains from trade versus individual impacts.
Winners and losers. Why textile workers may
oppose NAFTA. Economic theory of regulation and
political science.