Specialization: An example and a fable

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# Specialization: An example and a fable - PowerPoint PPT Presentation

Specialization: An example and a fable. Meet John and Dottie, two cooks in an Italian restaurant. In one hour, John can produce 2 S alads or 1 L asagna serving, while in one hour, Dottie can produce 3 S alads or 6 L asagna servings

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Presentation Transcript
Specialization: An example and a fable

Meet John and Dottie, two cooks in an Italian restaurant. In one hour, John can produce

while in one hour, Dottie can produce

We say that Dottie has an absolute advantage in the production of both products.

Specialization (2)

If each works a 40 hour week, John can produce 80 Salads OR 40 Lasagna

while Dottie can produce

It’s obvious Dottie will specialize in Lasagna production if that’s possible. But is there any point in John producing anything?

Specialization (3)

Back up. Suppose the restaurant manager insists that everyone has to be a “generalist.”

So let’s say John produces 40 Salads (20 hours) and 20 Lasagna (20 hours) each week.

And Dottie produces 30 Salads (10 hours) and 180 Lasagna (30 hours) each week.

Total output: 70 Salads, 200 Lasagna. Can’t we do better?

Specialization (4)

Of course we can. But the manager has to get over his “generalist” fixation and let John and Dottie specialize in what each does better than the other things he/she does.

Each salad “costs” John ½ Lasagna, but it costs Dottie 2 Lasagna.

Each Lasagna “costs” John 2 Salads, but it costs Dottie only ½ salad. It’s cheaper to let John make the salads!

Specialization (5)

This comparison—what do I do better than the other things I do?—is a search for comparative advantage. Dottie obviously has a comparative advantage in Lasagna. But John has a comparative advantage too—in salads!

Total output with specialization:

80 Salads by John 240 Lasagna by Dottie

Mamma mia!

Specialization (6)

OK, specialization works within a firm. It increases total output. But what about

(1) The general contractor and the electrical contractor?

(2) The tax preparer and the piano teacher?

(3) Trade between the U. S. (light trucks) and Mexico (heavy trucks)?

Same deal—works here, too. Trade pays!