Economics: Why Specialization Increases Output

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Remember these production possibilities diagram. Here's Bernie and here's Ann. The slope of Bernie's production possibilities frontier is minus one-half. That's the opportunity cost of sweeping measured in terms of lost scrubbing. Ann's opportunity cost is negative one. That's her opportunity cost of sweeping in terms of lost scrubbing. Because sweeping is less expensive for Bernie, we had Bernie specialize in sweeping services and we showed that we could get a large increase in total output if we had Bernie completely specialize in sweeping.
So here's what we're going to have Bernie do. Rather than staying at sweeping two rooms and scrubbing two rooms, let's have Bernie completely specialize in sweeping, the task at which Bernie has the comparative advantage. So, Bernie's production point now moves all the way to the end of the production possibilities frontier. Bernie completely specializes in sweeping. So, here's Bernie's new output point right here. It's at the end of the production possibilities frontier, where Bernie is now sweeping six rooms and scrubbing zero. We had Ann then specialize by moving up in this direction. Ann reduces her sweeping, taking advantage of Bernie's low cost sweeping and Ann scrubs instead.
Ann moves her production point up to this dot on her production possibilities frontier. Ann winds up scrubbing nine rooms and sweeping only three rooms. When she does that, she's able to take advantage of Bernie's low cost sweeping and increase the total number of rooms that she cleans. Now, if you'll have a look over on the board, you'll see our totals with trade. With trade Bernie sweeps a total of six rooms and scrubs zero. Ann sweeps a total of three rooms and scrubs nine. The total number of scrubbed rooms is nine plus zero or nine. The total number of swept rooms is six plus three or nine. Working together, Bernie and Ann are able to sweep and scrub a total of nine rooms.
Looking at this picture, how could we have known that Bernie was going to wind up specializing in sweeping services? Well, we would know because Bernie's production possibilities frontier is flatter than Ann's. His slope is minus one-half, Ann's is minus one. Because Bernie's production possibilities curve has a flatter slope, we know that Bernie's opportunity cost is smaller for sweeping than Ann's is. Bernie has an opportunity cost of one-half rooms scrubbed. Ann has an opportunity cost of one whole room scrubbed. Therefore, Bernie will specialize in sweeping because he has a comparative advantage in sweeping. Ann will then specialize in scrubbing.
Now, finding the exact numbers where this story worked out requires a little bit of puzzle solving. I had to figure out, well, if Bernie specializes, that's six rooms worth of sweeping. So Ann has to do at least six rooms worth of scrubbing. Which leaves her, six time five is 30 minutes from an hour, that leaves Ann 30 minutes of half an hour for additional work. And since six and six is already taken care of then she would have to split that remaining time between sweeping and scrubbing. And that's how I wound up with her sweeping three rooms and scrubbing three additional rooms, for a total of nine.
The things you should learn from looking at the diagrams are as follows. First, the trader that has a flatter production possibilities frontier will have a comparative advantage in providing the good or service that is written on the horizontal axis. Here, Bernie has the comparative advantage in providing sweeping services, because his opportunity cost is lower in terms of scrubbing than Ann's opportunity cost. The next thing to notice is that if you have a comparative advantage in one good, you have a comparative disadvantage in the other good. Bernie has an opportunity cost of two rooms worth of sweeping for every room of scrubbing he does. Ann can scrub a room by only giving up one room worth of sweeping.
Because these slopes are reciprocal, if you have a comparative advantage in one good, you have a comparative disadvantage in providing the other good. Just as Bernie has a relatively low opportunity cost for sweeping, he has a higher opportunity cost than Ann for scrubbing. All right. So you've always got a comparative advantage in something. Even though Ann can sweep and scrub faster than Bernie, Bernie is relatively better at sweeping than he is at scrubbing and therefore his opportunity cost is lower and that's why he and Ann can get together and make a deal that benefits both of them. It's not driven by absolute advantage. The story is driven by comparative advantage and no matter how unproductive you are you always have a comparative advantage in something. Even though Bernie has higher cost for providing all services and Ann can do everything faster, Bernie is still relatively less unproductive at sweeping than he is at scrubbing. And that's how he and Ann can get together and make a profit.
The last thing to notice is that by getting together and trading, Bernie is able to make a deal that's satisfying to him. Before he was sweeping two rooms and scrubbing two rooms. Now that he's completely specialized in sweeping services, he would be willing to trade as many as four rooms worth of sweeping to get two rooms worth of scrubbing in exchange. That would put him right back where he was before and Ann is happy to give him two rooms worth of scrubbing, because that would leave her ahead of where she was before. So, once Bernie specializes, according to his comparative advantage, there's room for him and Ann to work out a deal that makes one or both of them better off. That's the magic of comparative advantage. By people specializing according to comparative advantage, everyone who's trading can gain.
In the next example, we'll use a story that sounds a little bit more like the international trade stories you read in the newspaper. We'll look at two countries that are producing two agricultural products and show that by specializing and trading, they can both be made better off.
Introduction to Economic Thinking
Comparative Advantage
Understanding Why Specialization Increases Total Output Page [2 of 2]