April 25, 2020
Microeconomics is a branch of economics that deals with the study of the various subsectors of the economy. It studies how these subsectors of the economy decide on how to allocate scarce resources in markets where buying and selling of goods and services is carried out. It examines how the allocation affects supply and demand of goods and services which in turn determines prices . These prices will in turn determine supply and demand of goods and services. ( Burkett , 2006)
Opportunity cost in business refers to the value of something given up in favor of something else. It is the amount of money one would earn if he/she invested in the optimal investment ( Heymann, 1990). For example, if a person has some money and has two options : to spend the money in option A or B, if he spends the money in option A, then option B is the opportunity cost and vice versa.
Assuming both Mary and john have constant opportunity cost of production between the production of both corns and pigs, then the price mechanism must be working to provide perfect competition between both parties. Mary’s opportunity cost of producing corn is 50 pigs per year while her opportunity cost of producing pigs is 200 pounds of corns per year . john’s opportunity cost of producing corn is 40 pigs per year while his opportunity cost of producing pigs is 80 pounds of corn per year.
The principle of absolute advantage refers an individual’s/party’s/company’s /country’s capacity to produce more of a good or service than its rivals with an equal amount of resources. Absolute advantage is determined by simply comparing labor productivities of Parties (Heymann, 1990) . Mary has an absolute advantage over John in corn production because she can produce more pounds of corn per year using the same amount of resources. She also has an absolute advantage over John in raising of pigs since she raises more pigs per year using the same amount of resources.
The law of comparative advantage refers to an individual’s/company’s/ country’s capacity to produce a certain good or service at a lower opportunity cost than its competitors (Heymann, 1990). Mary has a comparative advantage in corn production over John because she has a lower opportunity cost in it . She produces 200 pounds of corn at the expense of only 50 pigs. She forgoes less to produce more. John has a comparative advantage in raising of pigs. If Mary was to invest in pig production, this would be at the expense of corn production which she does well in.
Trading at a rate of 2.5 pounds of corn for 1 chicken , only John would be better off. This is because if he was to trade in corn, he would only have 32 chicken at year end instead of 40 pigs. This means that he invests in pig production in which he has comparative advantage at the expense of only 32 chicken. Marry would be worse off investing in her area of comparative advantage which is corn production. This is because, at year end, she would only have 80 chicken . In my opinion , having 50 pigs at year end is better than having 80 chicken as far as their value is concerned.
Businesses and the society should invest in areas in which they have a lower opportunity cost and an higher absolute advantage (Heymann, 1990). For example , if a business has two investment alternatives , say A and B, it should go for the alternative which has the higher benefits. If a country has very good sustainable rain-fed agriculture production as opposed to mineral resources, it should make agriculture the backbone of its economy as opposed to mining.
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