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For government, this process often involves trying to identify where additional spending could do the most good and where reductions in spending would do the least harm. At the individual and firm level, the market economy coordinates a process in which firms seek to produce goods and services in the quantity, quality, and price that people want.
But for both the government and the market economy, in the short term, increases in production of one good typically mean offsetting decreases somewhere else in the economy. Often, how much of a good a country decides to produce depends on how expensive it is to produce it versus buying it from a different country.
In particular, its slope gives the opportunity cost of producing one more unit of the good in the x-axis in terms of the other good in the y-axis. Countries tend to have different opportunity costs of producing a specific good, either because of different climates, geography, technology, or skills. Suppose two countries, the U.
Due to its climate, Brazil can produce a lot of sugar cane per acre but not much wheat. Conversely, the U. Clearly, Brazil has a lower opportunity cost of producing sugar cane in terms of wheat than the U. The reverse is also true; the U. This can be illustrated by the PPF of each country, shown in Figure 2, below.
When a country can produce a good at a lower opportunity cost than another country, we say that this country has a comparative advantage in that good. In our example, Brazil has a comparative advantage in sugar cane, and the U. One can easily see this with a simple observation of the extreme production points in the PPFs. If Brazil devoted all of its resources to producing wheat, it would be producing at point A. If, however, it devoted all of its resources to producing sugar cane instead, it would be producing a much larger amount, at point B.
By moving from point A to point B, Brazil would give up a relatively small quantity in wheat production to obtain a large production in sugar cane.
The opposite is true for the U. If the U. Added to your Shopping Cart! Continue shopping. From the Blog. Lifting productivity growth via immigration 2nd May Inside an ultra-efficient BMW factory 17th April Growth without Industrialization 10th October What's behind low productivity and flatlining pay? Productive Efficiency: How Amazon gets packages to you 3rd December Mergers and increasing concentration in European universities 25th November Whitbread to pay the Living Wage 9th September Buying, selling and efficiency - price discrimination in action!
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