Microeconomics Suppose That Two People, Michelle and Case Study

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Microeconomics

Suppose that two people, Michelle and James each live alone in an isolated region. They each have the same resources available, and they grow potatoes and raise chickens. If Michelle devotes all her resources to growing potatoes, she can raise 200 pounds of potatoes per year. If she devotes all her resources to raising chickens, she can raise 50 chickens per year. (If she apportions some resources to each, then she can produce any linear combination of chickens and potatoes that lies between those extreme points. If James devotes all his resources to growing potatoes, he can raise 80 pounds of potatoes per year. If he devotes all his resources to raising chickens, he can raise 40 chickens per year. (If he apportions some resources to each, then he can produce any linear combination of chickens and potatoes that lies between those extreme points.)

Opportunity Cost

The opportunity cost represents the amount of a certain good that one party is forced to forgo in favor of producing another good (Bowles, 2006). Accordingly, in this scenario Michelle's opportunity cost for producing potatoes is 50 chickens because this is the precise number of chickens she would be giving up by growing only potatoes.

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Conversely, Michelle's opportunity cost for growing chickens is 200 potatoes because this is the precise number of potatoes she would be forgoing by growing chickens. James' opportunity cost for growing potatoes is 40 chickens because this is the precise number of chickens he would be giving up in order to grow only potatoes. Conversely, his opportunity cost for growing chickens is 80 potatoes because this is the precise number of potatoes he would be forgoing in order to grow only chickens.

Absolute Advantage

The absolute advantage refers to the party with the greatest capacity to produce (Bowles, 2006). In other words, an entity with an absolute advantage can produce the greatest quantity. However, it is important to note that an absolute advantage does not take into account productive efficiency (Bowles, 2006). Thus, in this case, Michelle has the absolute advantage in producing both goods because she has the capacity to produce more of both chickens and potatoes.

Comparative Advantage

Comparative advantage refers to one party's ability to produce relative to another party's ability to produce (Bowles, 2006). This concept aims to determine which producer is more efficient at producing a certain good. In the above example, Michelle would.....

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