In: Economics
The division of labor is extremely important for the efficiency of production. Comparative advantage refers to a situation when the opportunity cost of producing a particular good is lower for one producer than the other. Let us see an example:
Let there be two firms A and B, who use labor to produce two goods X and Y. The maximum amount of the two goods that can be produced ina day when labor is used for the production of one good only is:
A: X = 20, Y = 60
B: X =8 , Y = 16
Now, country A has an absolute advantage (higher production of a good given the resources) in both X and Y.
The opportunity cost of X for A = 60/20 = 3 units of Y
The opportunity cost of Y for A = 20/60 = 1/3 units of X
The opportunity cost of X for B = 16/8 = 2 units of Y
The opportunity cost of Y for B = 8/16= 1/2 units of X
Now, since the opportunity cost X is lower in B, B has a comparative advantage in X
Now, since the opportunity cost Y is lower in A, A has a comparative advantage in Y
Thus, for maximum efficiency, producer A should specialize in the production of Y and Producer B should specialize in the production of X.