PowerPoint PresentationSlide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48Slide 49Specialization and ExchangeOverheadsSpecializationSpecialization - A method of production in which each agent (firm) concentrates on a limited number of activitiesSpecialization and exchangeSpecialization and exchangeExchangeExchange - The act of trading with others to obtain what we desireSpecialization and ExchangeThere are gains to specializing in a small number of tasksand trading the products we produce as compared to doing it all ourselvesSteak and eggsExamplesBeef and laying hensMedical care and automobile careHair styling and plumbingPrinciple of specialization and exchangeSpecialization and exchange enable us to enjoygreater production and higher living standardsthan would otherwise be possibleAs a result, all economies have been characterizedby high degrees of specialization and exchangeWHY?Why specialization and exchange make us better off1. Time to learn & acquire skills / learning by doing3 reasons specialization paysFinish carpenterX- ray technicianElectrical engineerMIS consultant2. Set-up and switching timeTriplets in the copy shopFire brigadeIce cream sundaesWooden pallet constructionAdam Smith and Pins3. Comparative advantage1. Time to learn & acquire skills / learning by doing2. Set-up and switching time3. Comparative advantageWhy specialization and exchange make us better offWhat is comparative advantage?Comparative advantage is the ability toproduce a good or service at alower opportunity cost than other producersThe track coach’s dilemmaTwo runners (A & W) are projected to place 1-2in 400 meter hurdles, and 2-5 in the 400 meter dashScoring is as follows:Place Points 1 7 2 5 3 4 4 3 5 2 6 1Only one of the runners can run each raceWhat should he do?Hurdles Place Points Dash Place Points Total PointsA WFigure it outW APlace Points 1 7 2 5 3 4 4 3 5 2A will be 1st in hurdles, 2nd in dashW will be 2nd in hurdles, 5th in dash1 7 4 3 101 7 2 5 12Absolute versus comparative advantageAn individual producer has an absolute advantage in the production of a product if he has the ability to produce the good or service usingfewer resources than other producers use.An individual producer has a comparative advantage in the production of a product if she has the ability to produce the good or service at alower opportunity costthan other producers.The Flintstone EconomyWilmaFredTurnips Mastodons201802Output per hourThis data is output per unit of input dataTons per acreCars per dayShirts per hourReturns per dollar investedTurnips or mastodons per hourWho has the advantage in what?Wilma has an absolute advantage inturnip gathering and in mastodon huntingWilma is more efficient at both activities!!Comparative Advantage is Measuredin TermsTerms of Opportunity CostThe The opportunity costopportunity cost of any choice of any choiceis is what we give upwhat we give up when we make when we makethat choicethat choiceWhat does Fred give up to get a mastodon?What does Fred give up to get a mastodon?Fred gives up 20 turnips to get one mastodonFred gives up 20 turnips to get one mastodon1 mastodon costs 20 turnips1 mastodon costs 20 turnipsWilmaFredTurnips Mastodons20 180 2Output per hourWilmaFred1 Turnip 1 Mastodon20 turnipsOpportunity Cost of:Pricing in the Flintstone economywith turnips as the unit of exchangeFred 1 mastodon costs 20 turnipsIndividual Opportunity CostIf Fred could pick up 40 ants per hour then20 / 1 = 2020 /40 = 1/2Fred 1 ant costs 1/2 turnipWhat about Wilma?What about Wilma?Wilma gives up 40 turnips per mastodonWilma gives up 40 turnips per mastodon1 mastodon costs 40 turnips1 mastodon costs 40 turnips80 / 2 = 4080 / 2 = 40WilmaFredTurnips Mastodons20 180 2Output per hourWilmaFred1 Turnip 1 Mastodon20 turnips40 turnipsOpportunity Cost of:Who has the lowest opportunity cost for mastodons?20 t40 tWilmaFredTurnips MastodonsFred has a comparative advantage in mastodon hunting!Pricing in the Flintstone economywith turnips as the unit of exchangeFred 1 mastodon costs 20 turnipsIndividual Opportunity CostWilmaFred has a comparative advantage in mastodon hunting!1 mastodon costs 40 turnipsFred gives up less turnips for a mastodonThe good that is the unit of comparisonThe numerairenumeraire good is used as a way ofmeasuring the opportunity costopportunity cost of other goods, in an economy is called thenumerairenumeraire good(or exchange)(or exchange)(or account)(or account)or how many units of the numeriarenumeriare must begiven upfor one unit of a given goodIn our example so far, turnips were theunit of exchange or numeraireWilmaFredTurnips Mastodons20 t40 tNow make mastodons the unit of exchangeWhat does Fred give up to get a turnip?What does Fred give up to get a turnip?Fred gives up 1/20 of a mastodon per turnipFred gives up 1/20 of a mastodon per turnip1 turnip costs 1/20 of a mastodon1 turnip costs 1/20 of a mastodonWilmaFredTurnips Mastodons20 180 2Output per hourWilmaFred1 Turnip 1 Mastodon1/20 mastodon 20 turnips40 turnipsOpportunity Cost of:What about Wilma?What about Wilma?Wilma gives up 1/40 mastodon per turnipWilma gives up 1/40 mastodon per turnipWilmaFredTurnips Mastodons20 180 22 / 80 = 1/402 / 80 = 1/401 turnip costs 1/40 of a mastodon1 turnip costs 1/40 of a mastodonWilmaFred1 Turnip 1 Mastodon1/20 mastodon 20 turnips40 turnipsOpportunity Cost of:1/40 mastodonWho has the lowest opportunity cost for turnips?Wilma has a comparative advantage in turnip digging!20 t40 tWilmaFredTurnips Mastodons1/20 m1/40 mPricing in the Flintstone economywith mastodons as the unit of exchange (numeraire)Fred 1 turnip costs 1/20 of a mastodonIndividual Opportunity CostWilma 1 turnip costs 1/40 of a mastodonWilma has a comparative advantage in turnip digging!Wilma gives up less mastodons for a turnipHow to determine who has the comparative advantage in what2. Make an opportunity cost table (agents by goods)1. Determine the output per period of each agent5. The person with the lower opportunity cost has a comparative advantage in the production of each good3. For each good (column) choose a unit of exchange4. Determine
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