Some Tools of the Economist
Because of scarcity, when an individual chooses to do, to make, or to buy
something, that individual must simultaneously give up something
else that might otherwise have been chosen. The highest valued
activity sacrificed is the opportunity cost of the choice.
Trade is productive. Voluntary exchange creates value by channeling goods
into the hands of people who value them most. Recognition of
this fact exposes the physical fallacy, which incorrectly
assumes that a good or a service has a given value, regardless
of who uses it and how it is used. Trade is a positive-sum game
that improves the economic well-being of each voluntary
participant.
The production possibilities curve reveals the maximum combination of any
two products that can be produced with a fixed quantity of
resources, assuming that the level of technology is constant.
When an individual or an economy is operating at maximum
efficiency, the combination of output chosen will be on the
production possibilities curve. In such cases, greater
production of one good will necessitate a reduction in the
output of other goods.
The production possibilities curve of an economy can be shifted out ward
by (a) current investment that expands the future resource base
of the economy, (b) technological advancement, and (c) the
forgoing of leisure
and an increase in work effort. The last factor indicates that
the production possibilities constraint is not strictly fixed,
even during the current
time period. It is partly a matter of preference.
Production can often be expanded through division of labor and
cooperative effort among individuals. With division of labor,
production of a commodity can be broken down into a series of
specific tasks. Specialization and division of labor often lead
to an expansion in output per worker because they (a) permit
productive tasks to be undertaken by the individuals who can
accomplish those tasks most efficiently, (b) lead to improvement
in worker efficiency as specific tasks are performed numerous
times, and (c) facilitate the efficient application of machinery
and advanced technology to the production process.
Joint output of individuals, regions, or nations will be maximized when
goods are exchanged between parties in accordance with the law
of comparative
advantage. This law states that parties will specialize in the
production of goods for which they are low opportunely cost
producers and exchange these for goods for which they are high
opportunity cost producers. Pursuit of personal gain will
motivate people to specialize in those things they do best (that
is, for which they are low opportunity cost producers) and sell
their products or services for goods for which they are high
opportunity cost producers.
Every economy must answer three basic questions: (a) What will be
produced? (b) How will goods be produced? (c) How will the goods
be distributed? These three questions are highly interrelated.
There are two basic methods of making economic decisions: The market
mechanism and public-sector decision-making. The decisions of
individuals will influence the result in both cases. The tools
of economics are general. They are applicable to choices that
influence both market- and public-sector decisions.
