[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

TABLE 2.4
LABOR PRODUCTIVITY IN PRODUCING
COMPUTERS AND SHIRTS
North
South
Computers produced with 100 hours of labor 5 1
Shirts produced with 100 hours of labor 100 50
OPPORTUNITY COST OF PRODUCING
COMPUTERS AND SHIRTS
North
South
Opportunity cost of a computer (in terms of shirts) 20 50
Opportunity cost of 100 shirts (in terms of computers) 5 2
North will be willing to accept no less than 20 shirts from South in exchange for 1 computer.
If South were to offer fewer than 20 shirts for a computer, North would be
better off producing its own shirts. Because the opportunity cost of a computer in
South is 50 shirts, South will be willing to pay no more than 50 shirts to obtain a
computer from North. As long as the price for a computer lies between 20 and 50
shirts per computer, both countries can gain if North shifts labor into computer production,
South shifts labor into textile production, and the two then engage in trade.
For example, if the price of a computer is 30 shirts, South can buy 1 computer from
North (leaving South with the same number of computers as it had previously) and
it will still have 20 shirts left over to better clothe its own residents. Meanwhile,
North reduced its own shirt production by 20 shirts, but was able to obtain 30 shirts
in exchange for the extra computer it produced. So North is also better off. North will
benefit by exporting computers to South, and South will benefit by exporting textiles
to North.
By recognizing the important role of opportunity cost, we can understand why
both North and South gain from specializing in production and engaging in international
trade. Despite the economists’ argument that free trade can benefit both countries,
many people oppose moves to promote international trade. Their arguments,
and the role of various government policies that affect international trade, will be the
subject of Chapter 19.
SUNK COSTS
Economic cost includes costs, as we have just seen, that noneconomists often exclude,
but it also ignores costs that noneconomists include. If an expenditure has already
been made and cannot be recovered no matter what choice is made, a rational person
would ignore it. Such expenditures are called sunk costs.
42 ∂ CHAPTER 2 THINKING LIKE AN ECONOMIST