TM 3-1 Copyright © 1998 Addison Wesley Longman, Inc. Introduction to Economics Division of Labor. Production Possibilities and Opportunity cost.

TM 3-1Copyright © 1998 Addison Wesley Longman, Inc.

Introduction to Economics

Division of Labor. Production Possibilities and Opportunity

cost.


Learning Objectives

• Explain the division of labour

• Explain the fundamental economic problem

• Define the production possibility frontier

• Define and calculate opportunity cost

• Explain the conditions in which resources are used efficiently.


Learning Objectives (cont.)

• Explain how economic growth expands production possibilities

• Explain how specialization and trade expand production possibilities


Division of Labor: Definition

• is the specialization of cooperative labour in specific, circumscribed tasks and roles. Historically an increasingly complex division of labour is closely associated with the growth of total output and trade, the rise of capitalism, and of the complexity of industrialization processes.

• The specialization supposes cooperation!


Division of labour :

Natural division of labour:

Men vs. Women ; Mountains vs. Valley Regions;

Social division of labour: from Primitive society to modern economy – hunting, plant-growing, stock-breeding, craftsmanship, manufacturing, trading, industrial production.


Division of labour :National Economy-

A. Division by sectors: agriculture, industry and services

B. Division by branches: shipbuilding, car manufacturing, electronics, chemical industry, construction industry, textile industry, food industry, transportation, communications, banking, entertainment, legal services, education, health care, etc.

C. Inter-company division – horizontal (within the same industry) or vertical – among companies from different industries.

D. Intra-company division of labour – for instance, BMW – different departments and divisions of the company produce different goods and services: components, aggregates, mechanisms, tuning, painting, assembling, quality control, etc.

E. Intra-departmental division of labour (for instance, professor from the same department have specialized in teaching of different courses.


Division of labour :Global division of labour

In one recent study, Deon Filmer estimated that 2,474 million people participated in the global non-domestic labour force. Of these, around 15%, or 379 million people, worked in industry, a third, or 800 million worked in services, and

over 40%, or 1,074 million, in agriculture.

International division of labour : by country, by regions and organizations (EU, NAFTA, etc.) – oil exporting countries, food exporting countries, high-tech products exporting countries, etc.


Division of labour:

• Sir William Petty was the first modern writer to take note of division of labour, showing its existence and usefulness in Dutch shipyards. Classically the workers in a shipyard would build ships as units, finishing one before starting another. But the Dutch had it organised with several teams each doing the same tasks for successive ships.



• Adam Smith : In the first sentence of An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Adam Smith foresaw the essence of industrialism by determining that division of labour represents a qualitative increase in productivity. His example was the making of pins.



• Karl Marx

• Increasing the specialisation may also lead to workers with poorer overall skills and a lack of enthusiasm for their work. This viewpoint was extended and refined by Karl Marx. He described the process as alienation; workers become more and more specialised and work repetitious which eventually leads to complete alienation. Marx wrote that "with this division of labour", the worker is "depressed spiritually and physically to the condition of a machine". He believed that the fullness of production is essential to human liberation and accepted the idea of a strict division of labour only as a temporary necessary evil.


Division of labour:

K. Marx : wrote that "with this division of labour", the worker is "depressed spiritually and physically to the condition of a machine". He believed that the fullness of production is essential to human liberation and accepted the idea of a strict division of labour only as a temporary necessary evil.



Marx's most important theoretical contribution is his sharp distinction between the social division and the technical or economic division of labour. That is, some forms of labour co-operation are due purely to technical necessity, but others are purely a result of a social control function related to a class and status hierarchy.


Limited Resources

The resources that are used to produce goods and services are:

• Labor

• Land

• Capital

• Entrepreneurship


Limited Resources

Labor

The time and effort that we devote to producing goods and services.

Land

The gifts of nature that we use to produce goods and services.


Limited Resources

Capital

The goods we use to produce other goods and services.

• Includes physical capital

• interstate highways, buildings, and dams

• and human capital

• the knowledge and skill that people obtain from education and on-the-job training


Limited Resources

Entrepreneurship

The resource that organizes labor, land, and capital.


Unlimited Wants

Our wants are insatiable.

Humans, by nature, would like to have more of those things they find desirable.


Resources and Wants

We have limited resources.

We have unlimited wants.

This leads to scarcity.

Scarcity exists when there are insufficient resources to satisfy people’s wants.


Economics

Economics is the study of the choices people make to cope with scarcity.


Learning Objectives






Resources, Production Possibilities, and Opportunity Cost

The production possibilities frontier is used to illustrate the maximum quantity of two goods that can be produced due to scarcity.


Tapes Soda(millions (millions of bottles

Possibility per month) per month)

Production Possibilities Frontier

a 0 and 15

b 1 and 14

c 2 and 12

d 3 and 9

e 4 and 5

f 5 and 0


Attainable

Production Possibility FrontierS

oda

(mill

ions

of

bottl

es p

er m

onth

)

Unattainable

Tapes (millions per month)0 1 2 3 4 5

5

10

15

z

ab

d

c

f

e


Opportunity Costs

Opportunity Cost

All tradeoffs involve a cost -- an opportunity cost.


Opportunity Costs

• The opportunity cost of an action is the highest valued alternative foregone.

• Opportunity costs increase as we desire to produce more CDs.

• This explains the shape of the PPF -- it is bowed outward.


Opportunity Costs

Opportunity Cost Is a Ratio

The decrease in the quantity produced of one good divided by the increase in the quantity of another good.

Increasing Opportunity Cost

Opportunity costs tend to increase because not all resources are equally productive in all activities.


Using Resources Efficiently

Marginal cost

The opportunity cost of producing one more unit of a good or service.

The marginal cost of an additional tape is the quantity of soda that must be given up to get one more tape — the opportunity cost.


Opportunity Cost and Marginal Cost

CDs (millions per month)0 1 2 3 4 5

10

15a

b

c

d

e

f

0 1 2 3 4 5

5

Sod

a (m

illio

ns o

f bo

ttles

per

mon

th)

Increasing opportunity cost of CDs...


Opportunity Cost and Marginal Cost

CDs (millions per month)0 1 2

Sod

a (m

illio

ns o

f bo

ttles

per

mon

th)

1

2

3

4

5…means increasingmarginal cost of CDs.

MC


Marginal Benefit

Marginal benefit

The benefit that a person receives from consuming one more unit of a good or service.

It is measured as the maximum amount that a person is willing to pay for one more unit.

Decreasing Marginal Benefit

The more we have of any one good or service, the smaller is our marginal benefit.


Marginal Benefit

a 0.5 5

b 1.5 4

c 2.5 3

d 3.5 2

e 4.5 1

CDs Willingness to Pay Possibility (millions per month) (bottles per CD)


Marginal Benefit

CDs (millions per month)0 1 2 3 4 5

Sod

a (m

illio

ns o

f bo

ttles

per

mon

th)

1

2

3

4

5

MB

Decreasingmarginalbenefit from CDs.


Learning Objectives






Efficient Use of Resources

Efficiency

• Implies that we cannot produce any more of any good without giving up something that we value even more highly.

• We compare the marginal cost to the marginal benefit.


Efficient Use of Resources

• If the marginal benefit of the last unit of a good exceeds its marginal cost, we increase production of that good.

• If the marginal cost of the last unit of a good exceeds its marginal benefit, we decrease production of that good.


MC

Efficient Use of ResourcesM

argi

nal c

ost a

nd w

illin

gnes

s to

pay

(

bottl

es o

f so

da p

er C

D)

CDs (millions per month)0 1.5 2.5 3.5 5

1

2

3

4

5

MB

Bottles of sodathat people are willing to forgo

Bottles of sodathat peoplemust forgo

Cost exceedsbenefit

Benefitexceedscost


Economic Growth

Economic growth is illustrated by an economy’s expansion in production over time.


Economic Growth

The Cost of Economic Growth

• The development of new goods and better ways of producing goods and services is technological change.

• The growth of capital resources is capital accumulation.

Does economic growth allow us to avoid opportunity costs?


PPF1

Economic GrowthC

D -

mak

ing

mac

hine

s (p

er m

onth

) c

1 2 3 4 5 6 7

2

4

6

10

8

b

a

PPF0

If we produce 6 machines a month (b), then the PPF rotates. We will be able to produce more CDs in the future.

b'

a'

CDs (millions per month)


Gains from Trade

Comparative Advantage

A person or nation has a comparative advantage in an activity if they/it can perform an activity at a lower opportunity cost than others.

Why is there a difference?• Differences in abilities

• Differences in resource characteristics



Tom’s Factory

• Can produce 4,000 CDs/hour or

• Can produce 1,333 cases/hour

Opportunity Cost

• To produce 1 case, he must decrease CD production by 3 CDs — opportunity cost.

• To produce 1 CD, he must decrease case production by 0.333 case — opportunity cost.


Comparative AdvantageNancy’s Factory

• Can produce 1,333 CD/hour or

• Can produce 4,000 cases/hour

Opportunity Cost

• To produce 1 case, she must decrease CD production by 0.333 — opportunity cost.

• To produce 1 CD, she must decrease case production by 3 cases — opportunity cost.



1 2 3 4

1

2

3

5

4

Cas

es (

thou

sand

s pe

r ho

ur)

Nancy’sPPF

1Tom’sPPF

4

b

b'

a

Nancy’s opportunity cost:1 CD costs 3 cases, and 1 case costs 1/3 CD

Tom’s opportunity cost:1 CD costs 1/3 case, and 1 case costs 3 CDs

Trade line

c

CD (thousands of lengths per hour)


Absolute Advantage

• An absolute advantage exists when a person or nation can produce more of a good than another.

• Individuals and nations can have absolute advantages in any or all goods.

• However, it is not possible to have a comparative advantage in everything.


Dynamic Comparative Advantage

• People or nations can become more productive simply by repetition --learning-by-doing.

• Dynamic Comparative Advantage results from learning-by-doing.

• Examples: China, South Korea, Taiwan, Singapore, Mexico, Poland, Czech Republic

TM 3-1 Copyright © 1998 Addison Wesley Longman, Inc. Introduction to Economics Division of Labor. Production Possibilities and Opportunity cost.

Documents