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Specialization and Trade: CrCo Economics > .Opportunity Cost in Economics - Economics Explained > .1776-3-9 "The Wealth of Nations" - Scottish economist & philosopher Adam Smith > .
Energy as Currency ..
1) Economics is the study of scarcity and choices. We have limited resources, so we need a way to analyze the best way to use them.
2) Significant sustained increase in people's lives happened after Industrial Revolution.
3) Adam Smith concluded that division of labor made countries wealthy.
a. Analogy: one pizza takes few people to be created. One prepares ingredients, another puts it in the oven, another one puts it in the box. This division makes each worker more productive, since each one is focused on a thing they do best and they don't need to spend time switching between the tasks.
b. Without specializations, if you want something - you have to make it yourself.
c. So if you are good at producing something - specialize at it and then trade with others.
a. Analogy: one pizza takes few people to be created. One prepares ingredients, another puts it in the oven, another one puts it in the box. This division makes each worker more productive, since each one is focused on a thing they do best and they don't need to spend time switching between the tasks.
b. Without specializations, if you want something - you have to make it yourself.
c. So if you are good at producing something - specialize at it and then trade with others.
4) Production Possibilities Frontier (PPF) shows different combinations of two goods being produced using all resources efficiently.
a. Every possible combination inside the curve is inefficient. On the curve - efficient. Outside - impossible.
b. The country that can produce more goods of one kind (per time) than another country is having an absolute advantage over another country in production of those goods.
c. Opportunity cost is a cost of production of good, measured in losses in production of another good.
d. Country that can produce good with cheaper opportunity cost, has comparative advantage over another country.
e. Individuals and countries should specialize in producing things in which they have a comparative advantage and then trade with other countries that specialize in something else. This trade is mutually beneficial.
a. Every possible combination inside the curve is inefficient. On the curve - efficient. Outside - impossible.
b. The country that can produce more goods of one kind (per time) than another country is having an absolute advantage over another country in production of those goods.
c. Opportunity cost is a cost of production of good, measured in losses in production of another good.
d. Country that can produce good with cheaper opportunity cost, has comparative advantage over another country.
e. Individuals and countries should specialize in producing things in which they have a comparative advantage and then trade with other countries that specialize in something else. This trade is mutually beneficial.
5) If there is one point where economists agree it's that specialization and trade makes the world better off.
6) Self-sufficiency is inefficiency
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