Before we dive into this final post, here’s a superb video that sums up what we have been learning all week. Check it out!
Productive Efficiency Revisited
Remember the definition of productive efficiency? Productive efficiency means producing on the PPC, where all available resources are fully employed. “Fully” here means that resources are employed to their fullest extent. (i.e. not underemployed)
We have seen this week that under-employment occurs when people are not specialising in their areas of comparative advantage. Recall the Tarzan-Jane economy where without specialisation the combined production point is within the PPC.
This also implies that division of labour and specialisation are how economies can achieve productive efficiency. Again, recall how in the Tarzan-Jane economy, once specialisation takes place, they move onto the PPC. This result is generalisable to many people and many goods.
So now what?
So we have explained how economies can achieve productive efficiency, but this just creates another question — how do we coordinate this feat? Unlike in the Tarzan-Jane economy, we cannot share what we produce directly with each other. The trade has to take place through some special channels of exchange. Moreover, how do we decide how much to produce and what to produce? It’s one thing to know that who is good at producing what, but it’s another to decide the quantities and types of goods to be produced.
We have briefly answered some of the above questions by alluding to ‘the free market’ and the ‘price mechanism’ in previous posts. But the full story is far more interesting. Rest assured that by the time this 5 MOL! series is over, you’d be an expert in all these topics.
Question of the Day
Which of the following is the reason why economies without specialisation fail to achieve productive efficiency?
a) People do not enjoy what they are doing.
b) Costs of production are not minimised.
c) Too many of one good is produced.
d) The economy is too small.
The answer to yesterday’s question is 1) to exploit existing comparative advantage; 2) to further develop the worker’s absolute and comparative advantage through learning-by-doing
- Can two people engaged in a trade be worse-off after the trade? Can trade, in general, make anyone worse off?
We alluded to balanced preferences in the Tarzan-Jane economy. How do you think such preferences are communicated to producers in modern society?
We look forward to seeing your responses in the comments section below!
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Till next time, dream economics.
Good artists copy; great artists steal.