Specialization Limited by Costs of Exchange Adam Smith also emphasized incentives for technological advancement. The economist would say that the opportunity cost to society for taking resources from expanding industries (such as computer technology) to invest in declining industries may be so high that the use of antiquated machinery by declining firms is perfectly efficient. If I produce 1 more fish I must give up 1.5 coconuts (my opportunity cost). This increases the productivity (output per worker per hour) as well as quality of work done by a worker. Individuals seek those jobs they are capable of performing and that pay the highest wage or salary. So, why did we emphasize that specialization should be based on opportunity cost, i.e. Specialization and trade is called a positive sum game because we both are better off after exchange than we were before. There are several problems with barter: The introduction of money reduced the difficulty or costs of barter. Of course the role of money is much more extensive than this, but we will save that for a later chapter. In this situation absolute advantage has no meaning. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Breaking down the work process into simple, repetitive tasks eliminates the unnecessary workers on an assembly line and limits the handling of different tools and parts of different workers. In this situation the PPC shifts outward only along one axis (Figure 2-4). In this example Island A has absolute advantage in fish while Island B has absolute advantage in coconuts. Division of labour refers to the separation of a work process into a number of simple and separate tasks, with each task being performed by a separate person or a group of people. comparative advantage, and not the simpler concept of absolute advantage? Another way of identifying a comparative advantage is by analyzing the opportunity cost for the production of a commodity . Exchange is only possible because of production and specialization, production which is the creation of utility in the aspect of goods and services can be enhance through the breaking down of jobs into different segment, division of labor and specialization therefore leads to increase or excess in production, this excess therefore needs to be exchange for what others have also produced, for instance a producer of shoes can exchange … Quite simply by what pays you the most for your training and abilities. We each evenly split our time between cutting down coconuts and catching fish. For example, if the tradeoff considered is between making automobile engines versus motorcycle engines, the resources employed may be equally suitable in the production of either good. Japan, for example, imports scarce natural resources and uses its skilled labor force and technology to produce many products at comparative advantage to other countries. So that is.. and she also has a linear production possibilities frontier, so that right over there is the PPF for Patty. For example, increasing food production from 0 units to 10 units requires only a small reduction in clothing production. This is the currently selected item. The fundamental method of exchange is barter. Increasing opportunity costs is a reflection of the specialized characteristics of resources. The opportunity cost of producing more food increases as we move to the right in the graph. This implies the opportunity costs are constant at all points on the curves. Specialization is related to another economic concept, division of labor, discussed at great length by Adam Smith, the 18th-century … We can't answer that question without more information - specifically people's preferences. The application of the model with respect to opportunity cost and comparative advantage requires that we are operating at some point on the PPC. When we specialize we tend to concentrate our labor on one primary activity. Artificial barriers to trade (e.g., import tariffs). Adam Smith recognized that the increased productivity of labour after division happens due to the following reasons. This, in turn, may lead to the general workforce acquiring narrow skills. It is also generally considered that, because of the cost of training, workers to perform simple tasks is far less than training each worker to complete the whole production process, division of labour can lower average cost of production. When an individual specializes to produce one good, and then acquires additional desired goods from other specialists, answer choices. Higher output: the total output of goods and services will increase and the quality of goods and services produced will increase. In other words we can produce more of one good without requiring any sacrifice of production of the other good. Resources are not perfectly adaptable to alternative uses. 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