1. Specialization and Productivity:

The Basis for Specialization: o Specialization involves assigning production to the person who can perform the task with the least opportunity cost. o The person with the least opportunity cost is not necessarily the one who is best at performing the task.

The gains from specialization and absolute vs. comparative advantage:

Suppose, a farmer and a rancher each work 10 hours a day and they can devote time to growing potatoes, raising cattle, or a combination of two. The farmer can produce an ounce of potatoes in 15 minutes and an ounce of meat in 60 minutes. The rancher, who is more productive in both activities, can produce an ounce of potatoes in 10 minutes and an ounce of meat in 20 minutes.

| |Minutes needed to produce 1 ounce of |Amount produced in 10 hours |
| |Meat |Potatoes |Meat |Potatoes |
|Farmer |60 min/oz |15 min/oz |10 oz |40 oz |
|Rancher |20 min/oz |10 min/oz |30 oz |60 oz |

So how can the farmer specialize? He does not seem to be best at anything he produces. The answer lies on the basis of specialization. The farmer should produce more of the good for which he has the least opportunity cost. For that we have to know absolute and comparative advantage.

According to Mankiw (Principles of Macroeconomics 6E), absolute advantage is “the ability to produce a good using fewer inputs than another producer.” In the above example time is the only input, so we can measure the absolute advantage by looking at the time they require. From the above table, it can be seen that the rancher has the absolute advantage over the farmer both in producing meat and potatoes.

Let’s find their opportunity cost:

| |Opportunity cost of: |
| |1 oz meat |1 oz potato |
|Farmer |4 oz potatoes |¼ oz meat