TWO-PRODUCT MODEL:
Spiritual
Good
Material
Good
THREE PRODUCERS:
Ann
Ben
Cal
COST OF PRODUCING ONE UNIT OF SPIRITUAL GOODS:
Cal
½ Unit of Material Goods
Ben
1 Unit of Material Goods
Ann
2 Units of Material Goods
Question: Who is the most efficient producer of Spiritual Goods?
Obviously,
Cal is the most efficient producer of Spiritual Goods. Society loses only ½ Unit of Material Good
if Cal produces one Unit of Spiritual Goods.
Note: Efficiency = Value
of Output / Value of Input
The Value of Input is “what is not produced.”
Efficiency
= Value of Spiritual Goods / Value of Material Goods
COST OF PRODUCING ONE UNIT OF MATERIAL GOODS:
Ann
½ Units of Spiritual Goods
Ben
1 Unit of Spiritual Goods
Question:
Who is the most efficient producer of Material Goods?
Obviously, Ann is the most efficient producer of Material Goods. Society loses only ½ Unit of Spiritual Good if Ann produces one Unit of Material Goods.
What
does this example suggest? Society is
made better off if Ann Specializes in the production of Material Goods and Cal
specializes in the production of Spiritual Goods. Specialization increases
the total output of society’s goods and services.
A
necessary condition for a society to take advantage of (exploit) specialization
is trade, which allows these specialists
to exchange the goods, and services that they produce.
Specialization and trade allow societies to
exploit gains from trade.
As individuals, we all specialize in those activities in which we think we have the greatest comparative advantage and then we trade for the other goods and services that we want.
Sometimes
people make poor choices: Michael Jordan
switched to baseball!
Increasing
Marginal Costs Table