Choice, Opportunity Costs, and Specialization

1
Choice, Opportunity Costs, and Specialization

• Igor Lukashin
• ECN 111 Lecture 3
• ASU

2
Opportunity Costs

• Forgone benefits of the next best alternative
• Money Textbooks or Lift Tickets?
• Time Study, Watch TV, Workout, Work
• The cost of any item or activity includes the
  opportunity cost involved

3
Tradeoffs Marginal Decisions

• Tradeoff the giving up of one good or activity
  in order to obtain some other good or activity
• Limited resources gt allocate in a way that
  achieves maximum satisfaction
• Living Single Generic vs. Name Brands
• Marginal cost Additional cost (associated with
  the extra unit of good or activity
• Marginal benefit Additional Benefit

4
The Production Possibilities Curve (PPC)

• Shows the maximum quantity of goods and services
  that cana bee produced using limited resources to
  the fullest extent possible
• Overhead 1 - Figure 1 Ch. 2
• Points inside the PPC
• Inefficient, underutilize resources
• Points outside the PPC
• Unattainable given resources and technology

5
Shifts of the PPC

• Change in available resources
• Population Growth gt Labor up/down?
• Investment in Capital Typewriter or PC?
• Natural disasters Figure 2 Ch. 2
• Change in available technology
• Personal Computers
• Advances in Medicine
• Labor - how is it affected?

6
Specialization and Trade

• Marginal opportunity cost
• The amount of one good or service that must be
  given up to obtain one additional unit of another
  good or service, no matter how many units are
  being produced.
• Figure 3 Ch. 2 Overhead
• Marginal opportunity costs of good X increase
  with each successive increase of good X production

7
Specialization

• Individuals, firms and nations select the option
  with the lowest opportunity costs
• Specialization trade enables countries or
  individuals to have more of everything than if
  they try to produce everything
• Example Haiti and the Dominican Republic
• Health Care vs. Food Goods Selection?
• Overhead Figure 4 Ch. 2

8
Comparative Advantage

• The ability to produce a good or service at a
  lower opportunity cost than someone else
• Dominican Republic comparative advantage in food
  production
• Haiti comparative advantage in health care
• Can be better at both, but still have comparative
  advantage only in one

9
Specialization Always and Forever?

• What conditions must exist for you to specialize?
• Barter?
• Uncertainty?
• Russia Growing veggies on weekends. Why?
• Is it worth the effort to acquire general skills?
• PC? Change light bulb, tire?