There are many terms used in economics that are related to day-to-day life and the functioning of people and the economy. Most things are interrelated in economics as you are already aware of demand and supply. When there is demand, the supply increases and vice-versa. There is also a connection between opportunity cost and specialization. In this article, we will answer questions like does specialization lower opportunity cost and how is specialization related to opportunity cost.
What is Opportunity Cost?
In microeconomics, the value of a thing that you need to give up to gain that thing is termed opportunity cost. In simple words, while choosing between two things or activities, the one activity that you choose over another becomes the opportunity cost of the thing or activity that you did not choose.
For example: You have the choice of sleeping or studying at the moment, and you chose to sleep. Here the opportunity cost of studying is the sleep that you could be enjoying now.
Does Specialization Lower Opportunity Cost?
According to economists, specialization is the result of the comparative advantage in an economy of the company or nation. The absolute advantage is not in the picture. The ability to produce a particular good or service at lower opportunity cost in comparison to other producers is known as comparative advantage. So, the answer is yes, specialization reduces the opportunity cost.
What is Opportunity Cost in Investment?
For investment, opportunity cost means what you lose to gain another thing. While making the decision to invest in some stock or sell a batch of stocks, there are possibilities of gains or losses or both. Here, the loss that you incur to make profit in a deal is known as the opportunity cost.
What are Different Types of Opportunity Costs?
Based on the nature of the costs incurred by the person, firm, or organization, there are two types of opportunity costs, namely, implicit costs and explicit costs. Before knowing does specialization lower opportunity cost, look at the types of opportunity costs.
1. Implicit Costs
Utilizing the resources of the firm for a purpose that could have been used for another purpose is known as implicit costs. It is also referred to as notional, imputed, or implied costs. These costs are hidden and cannot be clearly defined or reported. Human labor, time, and infrastructure contributed by a business owner are a few examples of implicit opportunity costs. Here is an example to define this cost.
Printer of the company stops working or is not working properly. The time taken in operating the printer is more than before. Here, implicit opportunity cost is the production time that is being used up in the printing process that could have been used for the work if the printer was not broken.
2. Explicit costs
Direct costs or out-of-the-pocket costs incurred by the firm that are identifiable are known as explicit costs. These costs always have a monetary value and can be expressed for money. They are identified as expenses in the income statement and balance sheet of the firm. Paying salaries, bills, infrastructure and land costs, operational costs, maintenance costs, etc. are examples of explicit costs. Here is an example for you to understand better before you move ahead to know does specialization lower opportunity cost.
Printer is not working properly and managing the functioning and operating it has become difficult. Such that it becomes necessary to get it repaired. Here, the explicit opportunity cost for the firm will be the amount of aid to the technician for repairing the printer.
Why is Opportunity Cost Important?
It is necessary for an individual, firm, or economy to completely understand the concept of opportunity cost to cut losses and expenses. This way you will be prepared for any future consequences and learn to make better decisions about your business as well as your life.
What is meant by Specialization?
In economics, the term specialization is focusing on one task or activity to become perfect in it. Here, the person is not indulged in performing several tasks at a time. It is considered the basic concept of learning something.
How to Calculate Opportunity Cost?
Exact measure of the opportunity cost is difficult, but you can calculate the estimated future value that would not be received by you. It can easily be quantified by comparing the value of the lost choice with the value of the choice that you made. Here is the formula:
- Opportunity cost = FO – CO
Here, FO stands for Forgone Option or unselected choice, and it will represent its value. CO stands for the Chosen Option and the return expected on it.
How is Specialization Related to Opportunity Cost?
Specialization means that some resources are best for producing particular types of goods and services than another. A firm, individual or organization specializes in the production of that good or service with the lowest opportunity cost. Here the relation is interrelated because people tend to specialize in things that have lower opportunity costs than another.
What is an Absolute Advantage?
The person with the ability to produce more goods or services with fewer resources in comparison to another person is known to give absolute advantage to himself or the firm. Here are a few examples for you to understand it better.
- Andy and Brian went fishing with the same equipment. Andy caught 10 fish in 1 hour while Brian caught only 4 fish. Both used the same equipment, but the result was different. Here, Andy has absolute advantage in fishing over Brian.
- Jack and Jill had the same limit to gather as many coconuts as they can. Jack collected 10 coconuts, whereas Jill collected 12. Here, Jill has the absolute advantage over Jack in collecting coconuts.
How does Specialization Increase the Opportunities to Trade?
Does specialization lower opportunity cost on a global scale? While referring to global trade, specialization serves as the basis of it. If a country specializes in producing certain commodities that it is self-sustaining, and it can trade them to other countries, it means its trade is increasing. The country will trade those goods and services with other goods and services.
How is Specialization Advantageous for a Firm or an Economy?
Sine specialization reduces opportunity costs; it is highly beneficial and advantageous for both companies and countries. It helps in increasing production at considerably lower opportunity costs which in turn increases its profits. The chances of exceeding profit over expenses are high which will help the firm or the economy in the long run.
So, today you learned about does specialization lower opportunity cost. How is specialization related to opportunity cost? The answer to the relation between opportunity costs and specialization lies in the fact of the possible loss and gain. How does specialization increase the opportunities to trade? Well, to increase the trade opportunity costs must be lowered by making a wise decision.
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