Michelle’s opportunity cost of producing potatoes
The opportunity cost of producing potatoes would be the next best alternative action of producing chicken. Investing her entire resources in production of 200 pounds of potatoes per year would mean that she forgone best next alternative of using the same resources to venture in 50 pounds of chicken in the same period (Francis 2008).
Michelle’s opportunity cost of producing chickens
The opportunity cost of producing chickens would be the next best alternative action of instead producing potatoes. If she invests all her resources in production of 50 pounds of chicken a year then, she would have to forgo the next best alternative of using the same resources to produce 200 pounds of potatoes.
James’ opportunity cost of producing potatoes
The opportunity cost of producing potatoes would be the next option of producing chicken. By investing his entire resources in production of 80 pounds of potatoes a year, James would have forgone the best alternative of producing 40 pounds of chicken over the same period.
James’ opportunity cost of producing chickens
His opportunity cost of producing chicken would be the option he has of producing potatoes. That is to say, if he invests entire resources in the production of 40 pounds of chicken per annum then he would have forgone best option of producing 80 pounds of potatoes using same resources over similar period.
The person with absolute advantage in particular activities
James has absolute advantage in the production of chickens. Michelle on the other hand has the absolute advantage in production of potatoes. If Michelle devotes all her resources to potatoes, she can produce 200 pounds per year contrary to James who can only manage 80 pounds potatoes using similar resources over the same period (Nicholas 2012). However, her capacity to produce chicken is relatively low as illustrated by the ratio (200:50) = 4:1, James has absolute advantage over all the activities having a ratio of (80:40) = 2:1.
The person with comparative advantage in potatoes
Michelle has comparative advantage in the production of potatoes. She can produce 200 pounds of the commodity a year while James can only manage to produce 80 pounds over the same period.
The person with comparative advantage in chickens
James has comparative advantage in chicken production. His ratio of potatoes to chicken production is superior to that of Michelle. James (80:40) = 2:1, Michelle (200:50) = 4:1
Specializing and its impacts
Michelle has comparative advantage in the production of potatoes. Hence, she will specialize in potato production. James on the other hand will definitely specialize in the production of chickens. For every 200 pounds of potatoes that Michelle produces a year, James shall have produced 40 chickens. A good trading would therefore mean that one chicken exchanges for 5 pounds of potatoes (Nicholas 2012). However, a trading rate of 2.5 pounds of potatoes for every one chicken would mean that Michelle only exchanges 2.5 pounds of potatoes (half of 5) instead of five for the same chicken. Thus gets more chicken at half the economically sensible number. Hence, she would be better off while James in the process would be worst off.
Application of Opportunity cost to business enterprises, societies and Nations
Businesses, societies as well as nation as a whole should only venture into commodities they have comparative advantage over. Business enterprises and societies should never waste resources in projects or producing commodities, they have no advantage over. If a nation has adequate resources and technology for producing product X, then it should venture into large-scale production X for both domestic use and export (Irvin 2008). Instead, the country should import product Y, whose production is very low due to poor technology, inadequate raw materials, lack of expertise among other reasons from a country producing Y in large-scale for export. This will have positive impact on her Balance of Payment and encourage trade between them.
References
Irvin, Tucker. (2008) Microeconomics for Today. Ohio: Thomson Southwestern
Nicholas, Mankiw (2012).Principles of Economics. Ohio: South-Western Cengage Learning
Francis, Cherunilam (2008). International Economics. New Delhi : Tata McGraw-Hill
