9711

Efficient Total Production through Specialization

This Demonstration presents an economic model of two producers A and B that produce two goods X and Y. It is shown how specialization leads to an efficient total production. A and B can benefit from the increased total production through trade.

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The production possibilities frontiers of the two producers A and B are assumed to be linear. Producer A has a comparative advantage in the production of X. Producer B has a comparative advantage in the production of Y.
You can use the sliders to determine the production of A and B without specialization. Without specialization, the total production of A and B is not efficient, that is, the total production of A and B is not on the joint production possibilities frontier of A and B.
It is shown that specialization can increase the total production of A and B for both goods X and Y. An efficient total production can only be achieved if either A or B specializes in producing the good in which they have a comparative advantage.
In the case of specialization A can produce =20 units of X. B can produce =40 units of Y in the case of specialization. It depends on the ratio / whether A or B should specialize. If /, A must specialize in the production of X. If /, B must specialize in the production of Y, where denotes the units of X and denotes the units of Y produced by A and B together.
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