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raybromley.com Class Notes
by Ray Bromley

Resource use Decisions

One of the kinds of decisions to which we can apply the concepts of chapter 2 is the use of resources, such as a the time of workers.

Suppose there are three producers, Mr. A, Ms. B, and Ms. C. The three producers are essentially resources, and can be asked to produce various amounts of two goods, F and C

Mr. A could produce 120F in a given amount of time, OR 40C in the same amount of time. Presumably, A could also divide his time between production of the two goods and produce 60F along with 20C (dividing his time half and half), or 90F along with 10C (spending 3/4 of her time making F and 1/4 of the time making C), or 30F along with 30C (spending 1/4 of his time making F and 3/4 of the time making C), or other similar mixes.

Ms. B could produce 250F or 50C or some combination based on dividing her time (as we showed for A).

Ms. C could produce 200F or 50C or or some combination based on dividing her time (again, as we showed for A).

Suppose we want 100Cs and as many Fs as we can get in addition. In other words, we want to get the most we can get of Fs, given that we want 100Cs.
Another way to say this is that we want to use the resources in an efficient way. Efficiency just means getting as much as we can. How do we do it???

Two methods of using our resources might be suggested:

OPTION 1
Ms. B makes 50 Cs. Ms. C also makes 50 Cs. Mr. A makes only Fs (since Ms. B and Ms. C are making all the Cs we need), so Mr. A makes 120 Fs.
This results in 100 Cs and 120 Fs, in total.

OPTION 2
Mr. A makes 40 Cs. Ms.C makes 50 Cs.,Ms. B makes only 10 Cs (bringing the total to 100 Cs) but still has 4/5 of the day to make Fs, so Ms. B makes 200 Fs.
This results in 100 Cs and 200 Fs, in total.

The second option is more efficient, because it results in more Fs being produced, but no fewer Cs being made than the first option. We could say that the first option is inefficient, since it results in less than the most output or production possible.

An option is more efficient than another if it results in more of one good being produced, without less of some other good being produced.

One key to picking the efficient method of producing something is to pay attention to opportunity cost. In production, this means you pick the lowest cost way of getting what you want to produce. What do we call this behavior?

Economizing, Economization
The terms efficiency and economizing are related, but mean different things.
Efficient means you end up with the most.
Economizing means the way of doing things that requires you to give up the least

If you get the lowest cost producer (resource) to produce the thing they produce at lowest cost, then you end up with the most being produced.
In other words, if you economize, you’ll be efficient.

The law that says this will occur is the
law of comparative advantage. To remember what it means, think of it as the law of cost advantage (comparative and cost both begin with "co").
In general, a producer is said to have a comparative advantage in making or doing something if that producer can make that good or perform that service at lower cost than other producers can.

In our example, Mr. A has a comparative advantage in doing the C, while Ms. B has a comparative advantage in producing F. Here is why...

Mr. A could produce 120F OR 40C in the same amount of time. Thus, since 40C = 120F,

1C=	120F	= 3F
	40

so the cost of one C is 3 Fs. Also, since

120F = 40C,

1F=	40C	= 1/3C
	120

so the cost of one F is 1/3 C

Ms. B could produce 250F or 50C in the same amount of time. Thus, since 50C = 250F,

1C=	250F	= 5F
	50

so the cost of one C is 5 Fs. Also, since

250F = 50C,

1F=	50C	= 1/5C
	250

so the cost of one F is 1/5 C

Ms. C could produce 200F or 50C in the same amount of time. Thus, since 50C = 200F,

1C=	200F	=4F
	50

so the cost of one C is 4 Fs. Also, since

200F = 50C,

1F=	50C	= 1/4C
	200

so the cost of one F is 1/4 C

Comparing all three producers' costs (opportunity costs), the comparative advantage in producing C remains with Mr. A, but Ms. B has a comparative advantage in producing F (she can do F at lowest cost). This means that any C we want produced should be produced by Mr. A first (before we get anyone else to do it). Ms. C (whose cost of producing good C is second-lowest) would be our second choice for producing C (if we want more than Mr. A can make).

Ms. B should produce F first, before we seek F from any other producers. Ms. C, whose cost is second-lowest, should be our second choice of producers for making F. Mr. A should only be put to work doing Fs if we desire more of them than Ms. B and Ms. C (combined) can do.

While we can make such rules when one person is telling the producers what to do, how do such decisions get made in the "real world?"

Suppose Mr. A, Ms. C and Ms. B charge for each F and C they provide. Most of the time, people who hire them or buy their goods just want F. Once in a while, some people will pay them for a computer file.
Normally, the going price to have anyone produce a F is $.50 (fifty cents) every day.

Ms. B will be willing to do a computer file only if you paid her $2.50. This is because she could get that much money for theF she could produce with the same amount of time as it takes her to make one C ($2.50 is fifty cents times 5, and she could be making 5F).
The lowest price Ms. C would be willing to do a C for is $2.00 (again, because she could earn that much making F instead with the same amount of her time as it takes to make a C).
The lowest price at which Mr. A would be willing to sell a C for is only $1.50, since he is only giving up making 3 F (worth fifty cents each, in the time it takes him to make one C).

Consumers who economize will find that Mr. A will produce a C for less money than anyone else, and will seek him out first for any Cs that they want. No central authority, manager or organizer is needed to assure that comparative advantage will be the basis for determining who ends up making theCs (and, by extension, Fs). It is only necessary that each producer has some understanding of her or his own relative costs, and that this is reflected in the prices quoted to consumers.
Mr. A will end up producing only Cs, or produces all of theCs that get made. Thus, he is concentrating on computer files.
This concentration on doing a particular job or being the main producer of a thing is called
specialization or
division of labor

You may be worried about Ms. B. After all, of the three producers, she can make more F than anyone, and at least as much C as anyone else. The ability to produce more than anyone else is called an absolute advantage. Since Ms. B can produce more cF in a day than anyone, Ms. B has an absolute advantage in producing F. Absolute advantage does not tell us who will produce which good or perform which task. It does indicate that a producer might make more money than other producers (because he or she will make more product to sell or perform more services that consumers value).