Michelle’s opportunity cost for producing potatoes is high because she has the resources to produce 200 pounds per year. Her opportunity cost for producing chickens is lower because she can only produce 50 chickens per year.
Michelle has choices or alternatives to consider. She could maximize her production of 200 pounds of potatoes exclusively or 50 chickens exclusively or she could produce both and not maximize either. Her resources are good, but she still has to consider the economy, the scarcity of the product(s), consumer needs and her own personal income potential (profit).
James’ opportunity cost is similar to Michelle’s. His opportunity cost for producing potatoes is also high, while his opportunity cost for raising chickens is lower. He can produce 80 pounds of potatoes in one year or 40 chickens per year.
James’ also has choices or alternatives to consider. Should he produce both or should be produce potatoes since he can produce more than chickens. There’s so much for him to consider.
Both Michelle and James should consider conducting trials or research to evaluate scarcity, cost or marginal analysis in order to effectively maximize their profits.
Analyzing the scenario has been difficult—should they both spilt the difference between the two products and see which one produces more earnings? Should they try and produce one over the other? Which one gives them the absolute or comparative advantage?
Absolute advantage is the ability to produce a good with fewer inputs (Wessels, 2000). Michelle has the absolute advantage in growing potatoes because of where they live. Assuming, Michelle lives in a climate that has a better ground for growing potatoes because she can produce more, whereas James may live in an area where the ground is harder to grow potatoes. Michelle also has the advantage when raising chickens because, once again, where they live. Even though they both have the same resources available, they live in two different places where the climate makes a difference on how things grow how chickens would adapt to their environment.
Comparative advantage is the ability to produce a good at a lower relative cost (Wessels, 2000). Because James cannot produce as much as Michelle in potatoes or chickens, his relative cost would be lower, giving him the comparative advantage.
James would do better at a rate of 2.5 to 1 over Michelle. Michelle would only produce .625, whereas James would produce 12.5. Michelle’s equation is 200/50 times 1/2.5 and James’ equation would be 80/40 times 1/ 2.5. Obviously, this much production would be more profitable for James in production of potatoes and would be successful in a market that has a high demand for potatoes.