Microeconomics Unit 1 Individual Project1

Microeconomics Unit 1 Individual ProjectCynthia A. Collins

ECON220-1002B-13October 4, 2011

Microeconomics Unit 1 Individual Project2

Michelle’s opportunity cost of producing potatoes is ¼ of a chicken for every pound of

potatoes she grows a year equaling 50 chickens a year. Her prospect cost of raising chickens is 4

lbs of potatoes for every chicken she raises equaling 200 lbs of potatoes a year. James’ opening

cost of producing potatoes is ½ of a chicken for every pound of potatoes equaling 40 chickens a

year. His opportunity cost of raising chickens is 2 lbs of potatoes for every chicken equaling 80

lbs of potatoes a year.

In this example, Michelle has the general advantage in both areas. She can produce more

of each product using the same resources. Michelle has the virtual advantage in producing

potatoes. It would cost her ¼ of a chicken per lb. of potatoes as compared to James where it cost

him ½ of a chicken for a lb of potatoes. James has a comparative advantage in raising chickens.

He can raise a chicken and it would only cost him 2 # lbs of potatoes where for Michelle it will

cost her 4 lbs of potatoes to raise 1 chicken.

In this example James would benefit from a trade of 2.5 lbs of potatoes for every one of

his chickens. He would be receiving more in this trade than he could produce on his own if he

were to specialize in only growing potatoes. He would receive 100 lbs of potatoes as compared

to the 80 lbs he could produce on his own. Michelle would also benefit from this trade. At a

trade of 2.5 lbs of her potatoes for 1 of James’ chickens she would receive 80 chickens, if James

were able to raise that many. Being that he is only capable of raising 40 a year, Michelle would

obtain 40 chickens and still have 100 lbs of potatoes for herself. If Michelle were to concentrate

in only raising chickens, she would only be able to raise 50 in a year and would not have any

chickens.

This example explains to a nation by showing the benefits of a market economy. When

one nation can focus in an area and trade that service or good to another country for the service

Microeconomics Unit 1 Individual Project3

or good that this country focuses in it helps both economies grow and flourish. This type of

economy has proven to be a better choice than one such as communism where the marketplace is

dictated by central decision maker. Many times, this central decision maker will not be in touch

with consumer’s needs and the cost to yield goods, therefore making it difficult to determine the

price of a good. In a market economy, the price is determined by supply and demand making it

easier to dictate what to charge for a service or product.

Microeconomics Unit 1 Individual Project4

References

Mankiw, N. (2008). Principals of Economics (5th ed.). Mason, OH: South-Western CengageLearning