Understanding the concepts Table of Contents The problem of scar 3 Comparative advantage and benefits of trade 4 References 5 Bibliography 5 Concepts of economics often come of help during real life decision making processes. Often significant differences in the efficiency of decision making are noted after an entity is made aware about the operations of economic concepts. A business executive, for instance, was immensely helped after he was endowed with the knowledge on problem of scarcity and the benefits of trade. The problem of scarcity Mr. Steven Jones always wished to own a departmental store in the heart of Texas.
Neither did he lack the capital and nor labor to launch his plan. But little did he know that the volumes of resources he had been using incurred him an opportunity cost. Initially he operated at F using K1 units of capital and L1 units of labor and the cost that was incurred had been equivalent to C1, represented by the straight line tangent at F. But after he became aware about the problem arising out of scarcity of resources, he found himself placed at a disadvantageous point F, on the production possibility frontier, AB.
With market determined rates of capital and labor, the iso-cost line was found to be parallel to C0, indicating E to be the most profitable point of production. Being at F, Jones had been expending much higher amount of cost and had been using up too much of the scarcer resource of labor. After acquiring knowledge about operation on the PPF, he began targeting at attaining the position E as soon as possible and thus, minimize his cost of production (Hardy, 1978).
Thus Jones started replacing salesmen in his store through leasing trolleys that would assist the customers to choose products themselves rather than depending upon the former. Comparative advantage and benefits of trade After Jones gained knowledge about producing optimally when resources are scarce, he shifted his attention to diversify the goods that he sold. Initially he had been loading his shelves mainly with wheat products. In fact, his store had a huge stock of cereals made from wheat. However, he noted that his store was frequented more by the older people rather than the younger ones.
While the younger people pay a greater emphasis to taste, the older lot seems to be more conscious about their health and this fact was reflected upon their preference for oats over wheat products. The wholesale market from which Jones bought the wheat products is located nearby so that his cost of purchase is not as high for wheat as it is for oats which is sold at a farther wholesale market. Had he not known the benefits of trade and comparative advantage, Jones would have traveled and bought the oat products himself.
But, now he entered into a pact with one of his friends who also had a departmental store at the vicinity of the market selling oats. On a visit to his friend, Jones exchanged some of his wheat products with oats, and sold them at marked up prices in his store. Had he not been aware about the benefits of trade, he not only would have to expend much more in traveling and buying the oat products himself, but the amount spent on wheat products could not have been revived as well (Maneschi, 1998).
References Hardy, C. C. The investors guide to technical analysis. New York, USA: McGraw-Hill. 1978. Maneschi, A. Comparative advantage in international trade: a historical perspective. London, UK: Edward Elgar. 1998. Bibliography Baumol, W. J. & Blinder, A. S. Economics: Principles and Policy. USA: Cengage Learning. 2011.