A difference in opportunity costs between businesses can lead to a comparative a

By
Responsive Centered Red Button

Need Help with this Question or something similar to this? We got you! Just fill out the order form (follow the link below), and your paper will be assigned to an expert to help you ASAP.

Order Form

A difference in opportunity costs between businesses can lead to a comparative advantage in the production of a good and the decision to trade.
For this discussion, first play the simulation games Comparative Advantage (Without Trade) and Comparative Advantage (With Trade) in the MindTap environment. Then, you will share your experiences playing the games. Your work in this discussion will directly support your success on the course project.
In your initial post, include the image of your simulation report in your response. See the How to Submit a Simulation Report Image PDF document for more information. Then, address the following questions:
Imagine you own your own business. How would you evaluate opportunity costs and comparative advantage when making business decisions?
Look up a Production Possibilities Frontier (PPF) graph. What role does the production possibility frontier (PPF) model have in making business decisions regarding specialization and trade?
Consider your typical day. You wake up in the morning and pour yourself juice from oranges grown in Florida and coffee from beans grown in Brazil. Over breakfast, you read a newspaper written in New York on a tablet made in China. You get dressed in clothes made of cotton grown in Georgia and sewn in factories in Thailand. You drive to class in a car made of parts manufactured in more than a dozen countries around the world. Then you open up your economics textbook written by an author living in Massachusetts, published by a company located in Ohio, and printed on paper made from trees grown in Oregon.
Every day, you rely on many people, most of whom you have never met, to provide you with the goods and services that you enjoy. Such interdependence is possible because people trade with one another. Those people providing you with goods and services are not acting out of generosity. Nor is some government agency directing them to satisfy your desires. Instead, people provide you and other consumers with the goods and services they produce because they get something in return.
In subsequent chapters, we examine how an economy coordinates the activities of millions of people with varying tastes and abilities. As a starting point for this analysis, this chapter considers the reasons for economic interdependence. One of the Ten Principles of Economics in Chapter 1 is that trade can make everyone better off. We now examine this principle more closely. What exactly do people gain when they trade with one another? Why do people choose to become interdependent?
The answers to these questions are key to understanding the modern global economy. Most countries today import from abroad many of the goods and services they consume, and they export to foreign customers many of the goods and services they produce. The analysis in this chapter explains interdependence not only among individuals but also among nations. As we will see, the gains from trade are much the same whether you are buying a haircut from your local barber or a T-shirt made by a worker on the other side of the globe.
A Parable for the Modern Economy
To understand why people choose to depend on others for goods and services and how this choice improves their lives, let’s examine a simple economy. Imagine that there are only two goods in the world: meat and potatoes. And there are only two people: a cattle rancher named Ruby and a potato farmer named Frank. Both Ruby and Frank would like to eat a diet of both meat and potatoes.
The gains from trade are clearest if Ruby can produce only meat and Frank can produce only potatoes. In one scenario, Frank and Ruby could choose to have nothing to do with each other. But after several months of eating beef roasted, broiled, seared, and grilled, Ruby might decide that self-sufficiency is not all it’s cracked up to be. Frank, who has been eating potatoes mashed, fried, baked, and scalloped, would likely agree. It is easy to see that trade would allow both of them to enjoy greater variety: Each could then have a steak with a baked potato or a burger with fries.
Although this scene shows most simply how everyone can benefit from trade, the gains would be similar if Frank and Ruby were each capable of producing the other good, but only at great cost. Suppose, for example, that Ruby can grow potatoes but her land is not very well suited for it. Similarly, suppose that Frank can raise cattle and produce meat but is not very good at it. In this case, Frank and Ruby each benefit by specializing in what he or she does best and then trading with the other person.
The gains from trade are less obvious, however, when one person is better at producing every good. For example, suppose that Ruby is better at raising cattle and better at growing potatoes than Frank. In this case, should Ruby remain self-sufficient? Or is there still reason for her to trade with Frank? To answer this question, let’s look more closely at the factors that affect such a decision.
3-1aProduction Possibilities
Suppose that Frank and Ruby each work hours per day and can devote this time to growing potatoes, raising cattle, or a combination of the two. The table in ounce of each good. Frank can produce an ounce of potatoes in minutes and an ounce of meat in minutes. Ruby, who is more productive in both activities, can produce an ounce of potatoes in minutes and an ounce of meat in minutes. The last two columns in the table show the amounts of meat or potatoes Frank and Ruby can produce if they devote all hours to producing only that good.
Figure 1The Production Possibilities Frontier
Panel (a) shows the production opportunities available to Frank the farmer and Ruby the rancher. Panel (b) shows the combinations of meat and potatoes that Frank can produce. Panel (c) shows the combinations of meat and potatoes that Ruby can produce. Both production possibilities frontiers are derived assuming that Frank and Ruby each work hours per day. If there is no trade, each person’s production possibilities frontier is also his or her consumption possibilities frontier.
Panel (b) of hours of his time growing potatoes, Frank produces ounces of potatoes (measured on the horizontal axis) and no meat. If he spends all of his time raising cattle, he produces ounces of meat (measured on the vertical axis) and no potatoes. If Frank divides his time equally between the two activities, spending hours on each, he produces ounces of potatoes and ounces of meat. The figure shows these three possible outcomes and all others in between.
This graph is Frank’s production possibilities frontier. As we discussed in Chapter 2, a production possibilities frontier shows the various mixes of output that an economy can produce. It illustrates one of the Ten Principles of Economics in hour less producing meat and hour more producing potatoes, he reduces his output of meat by ounce and raises his output of potatoes by ounces—and this is true regardless of how much he is already producing. As a result, the production possibilities frontier is a straight line.
Panel (c) of Figure 1 shows Ruby’s production possibilities frontier. If she spends all hours of her time growing potatoes, Ruby produces ounces of potatoes and no meat. If she spends all of her time raising cattle, she produces ounces of meat and no potatoes. If Ruby divides her time equally, spending hours on each activity, she produces ounces of potatoes and ounces of meat. Once again, the production possibilities frontier shows all the possible outcomes.
If Frank and Ruby choose to be self-sufficient rather than trade with each other, then each consumes exactly what he or she produces. In this case, the production possibilities frontier is also the consumption possibilities frontier. That is, without trade, Figure 1 shows the possible combinations of meat and potatoes that Frank and Ruby can each produce and then consume.
These production possibilities frontiers are useful in showing the trade-offs that Frank and Ruby face, but they do not tell us what each will choose to do. To determine their choices, we need to know something about their tastes. Let’s suppose that Frank and Ruby choose the combinations identified by points A and B in Figure 1. Based on his production opportunities and food preferences, Frank decides to produce and consume ounces of potatoes and ounces of meat, while Ruby decides to produce and consume ounces of potatoes and ounces of meat.
3-1bSpecialization and Trade
After several years of eating combination B, Ruby gets an idea and visits Frank:
Ruby:
Frank, my friend, have I got a deal for you! I know how to improve life for both of us. I think you should stop producing meat altogether and devote all your time to growing potatoes. According to my calculations, if you work hours a day growing potatoes, you’ll produce ounces of potatoes. You can then give me of those ounces, and I’ll give you ounces of meat in return. In the end, you’ll get to eat ounces of potatoes and ounces of meat every day, instead of the ounces of potatoes and ounces of meat you now get. With my plan, you’ll have more of both foods. [To illustrate her point, Ruby shows Frank panel (a) of hours a day raising cattle and hours growing potatoes. Then I can produce ounces of meat and ounces of potatoes. After I give you ounces of my meat in exchange for ounces of your potatoes, I’ll end up with ounces of meat and ounces of potatoes, instead of the ounces of meat and ounces of potatoes that I now get. So I will also consume more of both foods than I do now. [She points out panel (b) of Figure 2.]
Frank:
I don’t know. . . . This sounds too good to be true.
Ruby:
It’s really not as complicated as it seems. Here—I’ve summarized my proposal for you in a simple table. [Ruby shows Frank a copy of the table at the bottom of Figure 2.]
Frank: (after pausing to study the table):
These calculations seem correct, but I am puzzled. How can this deal make us both better off?
Ruby:
We can both benefit because trade allows each of us to specialize in doing what we do best. You will spend more time growing potatoes and less time raising cattle. I will spend more time raising cattle and less time growing potatoes. As a result of specialization and trade, each of us can consume more meat and more potatoes without working any more hours.
Comparative Advantage: The Driving Force of Specialization
Ruby’s explanation of the gains from trade, though correct, poses a puzzle: If Ruby is better at both raising cattle and growing potatoes, how can Frank ever specialize in doing what he does best? Frank doesn’t seem to do anything best. To solve this puzzle, we need to look at the principle of comparative advantage.
As a first step in developing this principle, consider the following question: In our example, who can produce potatoes at a lower cost—Frank or Ruby? There are two possible answers, and in these two answers lie the solution to our puzzle and the key to understanding the gains from trade.
Absolute Advantage
One way to answer the question about the cost of producing potatoes is to compare the inputs required by the two producers. Economists use the term hours a day working. Time spent producing potatoes takes away from time available for producing meat. When reallocating time between the two goods, Ruby and Frank give up units of one good to produce units of the other, thereby moving along the production possibilities frontier. The opportunity cost measures the trade-off between the two goods that each producer faces.

How to create Testimonial Carousel using Bootstrap5

Clients' Reviews about Our Services