Comparative Advantage

Comparative Advantage Response

Initial Post

Opportunity cost can be considered as the foregone cost of the person or business as they select the best possible alternative for use in their decision-making process. The decision may be to buy a certain product and leave another or the decision to produce a certain product instead of the other. In such an instance, the business entity may forego the income it generates from selling a certain product as it downsizes or stops completely the production of that product (Karpac, & Bartosova, 2020). The business produces another superior product that will need to be launched and marketed in the operational market. In making the decision, the company will look at the bigger picture in terms of sustainability of the new product in the market and ability to withstand the emerging competition in the market hence foregoing the income of the current product. The foregone income is the opportunity cost of releasing a new product in the market. In comparative advantage, the business entity will look at the saving that will accrue in adopting the lean production system and maybe integration of more packaging formats due to reduced sizes concerning the phased product. Further, the business will use comparative advantage in considering the saving and efficiency enjoyed by the business by adopting a technological way of doing things. For example, a company in need of integrating technology in the customer service department will look at the saved cost and customer satisfaction realized through automated boards against the current system where there are several customer service personnel to handle incoming queries.

However, the decision to automate the customer service department will entail the cost of losing highly skilled customer service staff who the organization will not transfer to other departments. Moreover, it will come with the cost of the dismissed skilled staff being recruited by the competitors, higher severance package, and destroyed image depending on how the decision is communicated. The production possibility frontier (PPF) model helps the company in determining the optimal point of production since the company can identify where the marginal production is highest (Gowdy, 2020). Thus, a business entity will engage in producing products at the point where marginal production achieved is highest. Due to the sustainability of that production level in the company’s production system, the company gains efficiency and becomes more specialized in the production of that product. Therefore, its results in offering superior products in the market that satisfies the customers’ pain points.

Peer Response

Jazmarie Dicks

I agree with the peer that opportunity cost and comparative advantage are essential concepts that help a business entity to decide the best pricing model for their products that may be close substitutes to ensure they are not edged out of the market by competitors (Moloi, & Marwala, 2020). Moreover, the simulation image shows that there is a need for the business to engage in trade to realize higher sales that stand at 73 unlike without trade that stand at 72 with optimal combos being 80 units in both instances. Also, I agree with the peer observation that PPF helps in determining the production levels that lead to optimal resources allocation. However, I disagree with Dicks that running a personal business is time involving and denies one the time to rest and catch up with family. This is because even in well-established businesses they started small and as they grew the owners were able to put structure in place that matched the business size freeing more time for them as they engage in strategic decisions.

Barbara Maddox

The optimal combos captured in the image are given as 80 units without trade and they are all sold out. With trade, the optimal combos are 80 units with improved sales. Thus with trade, the business can easily make a decision based on the opportunity cost of increasing production above the optimal level to tap on the realized market as guided by the production possibility frontiers (PPF) (Karpac, & Bartosova, 2020). I agree with the peer view that purchased diesel at a good market price helped them to make good profits without necessarily overpricing their products. Moreover, the comparative advantage helped them to select the market where they will fetch better prices for their diesel. Thus exploring the opportunity cost of remaining in the current market and fetch low prices or explore new territories for better prices.

References

Gowdy, J. M. (2020). Microeconomic Theory Old and New. Stanford University Press.

Karpac, D., & Bartosova, V. (2020, December). The Importance of Opportunity Costs in Financial Management in Connection to the Economic Profit. In Fifth International Conference on Economic and Business Management (FEBM 2020) (pp. 350-353). Atlantis Press.

Moloi, T., & Marwala, T. (2020). Comparative Advantage. In Artificial Intelligence in Economics and Finance Theories (pp. 21-32). Springer, Cham.