Economic Problems' Solutions
This economics problem focuses on the ideas of absolute and comparative advantage. Absolute advantage is when someone can produce a good using less resources than another person producing the same good. Comparative advantage is the principle that trade (i.e. multi-tasking) can be more beneficial if the parties involved each produce a different good with relative different costs. In comparative advantage, what matters is not the absolute costs but rather the opportunity costs of production. This is the measure of how much the production of one good needs to be reduced in order to increase the output of another product by one unit.
Since Francis can produce more financial statements than Phil in the same period of time AND also answers more phone calls than Phil in the same period of time, Francis has absolute advantage over Phil in terms of productivity. However, because the opportunity of production costs differ, there is a benefit to divide the workload, even if Phil seems less productive.
We can calculate the opportunity of production costs of each individual for answering telephone calls by dividing the number of financial statements each could produce by the number of phone calls that could be answered in the same period of time:
1 financial statement 1
Phil = ————————— = —— = 0.125
8 telephone calls 8
2 financial statements 2
Francis = ————————— = —— = 0.20
10 telephone calls 10
The opportunity costs for Francis to answer phone calls is higher, therefore it makes more sense economically for Phil to answer phone calls (for which his opportunity costs of production are lower) and for Francis to make financial statements. In one hour, their combined output of work would be 8 telephone calls and 2 financial statements which is more than if they worked on both tasks. Specialization on one task increases their overall output.
- Baumohl, B. (2007). The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities (2nd Edition). Upper Saddle River, NJ: Wharton School Publishing.
- O'Sullivan, A., Perez, S., & Sheffrin, S. (2006). Economics: Principles, Applications, and Tools (5th Edition). Alexandria, VA: Prentice Hall.