101-5_07 - Econ 101 Lecture 5 How much does specialization...

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Econ 101 Lecture 5 How much does specialization matter? (I) Example 5.1 . George and Tom are mechanics. Tom can replace 15 clutches per day or 10 sets of brakes; George can replace 10 clutches per day or 15 sets of brakes. At their garage, the number of brake replacements performed each day is the same as the number of clutch replacements. How much more can they accomplish if they specialize than if each performed an equal number of brake and clutch replacements? By specializing, they can replace 15 clutches per day (Tom) and 15 sets of brakes (George). If they don’t specialize, each can replace only 6 clutches per day and 6 sets of brakes, for a total of 12 daily replacements of each type. A 25% increase in output isn’t bad, but cannot explain why industrialized countries produce so much more than developing countries. Aside: How do we know that George can produce 6 jobs of each type if he doesn’t specialize? First write the equation for George’s production possibilities curve: C = 10 - (2/3) B To say that we want an equal number of both types of jobs means that C = B. So substitute C for B in the production possibilities curve equation to get C = 10 – (2/3)C and solve for C = 6. And since C=B, that means B=6 also. How much does specialization matter? (II) Example 5.2 . George and Tom are mechanics. Tom can replace 30 clutches per day or 6 sets of brakes; George can replace 6 clutches per day or 30 sets of brakes. At their garage, the number of brake replacements performed each day is the same as the number of clutch replacements. How much more can they accomplish if they specialize than if each performed an equal number of brake and clutch replacements? By specializing, they can replace 30 clutches per day (Tom) and 30 sets of brakes (George). If they don’t specialize, each can replace only 5 clutches per day and 5 sets of brakes, for a total of 10 daily replacements of each type. 15 Clutch replace- ments per day Brake replace- ments per day 0 25 15 25 Clutch replace- ments per day Brake replace- ments per day 0 10 15 6 15 Clutch replace- ments per day Brake replace- ments per day 0 10 6 6 6 George Tom
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2 Now the gain in output is threefold. The gains from specialization are larger when differences in opportunity cost are larger, and when individuals enjoy absolute advantage in their respective specialties. In truth, the gains from specialization will often be far more spectacular.
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101-5_07 - Econ 101 Lecture 5 How much does specialization...

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