Friday, February 8, 2013

Differences in Production Costs

We can now take another small step towards reality. It is most unlikely that production costs will be the same for two or more producers. Differences in the ability to produce various goods may be the result of tradition (a man learns the art of producing apples from his father), or of natural conditions (apples grow better on his land than pears). But whatever the reasons, the fact remains that the cost of production of goods in terms of work-hours normally is different for different people.
Figure 2 has shown us what a single producer would produce and consume at various production cost levels, given a certain demand curve, i.e. a certain judgment of the comparative utilities of apples and pears. Suppose now that A can produce pears only at higher cost, i.e. by more work, than B. A may, for instance, be working under conditions represented by the supply curve S2 in Figure 2 (1 pear can be produced by sacrificing 3 apples), while B may be working under the conditions of supply curve S3 (1 pear can be produced by sacrificing 1/3 apple). If the demand curve for A and B were that of our original single producer (D), producer A would now do as the single producer did when faced with supply conditions S2, i.e. produce 10 pears and 20 apples; at the same time producer B would do as the single producer did when faced with supply conditions S3, i.e. produce 23 pears and 42 apples.
But the demand curves of A and B differ from those of our single producer; the demand curves now are as Da and Db in Figure 3. To demonstrate what will happen, we have only to amalgamate Figures 2 and 3 in Figure 4, which shows: Producer A, with demand conditions Da and supply conditions S2, produces 5 pears. To do so he must sacrifice 15 of the original total of 50 apples, leaving him with 35 apples. Producer B, with demand conditions Db and supply conditions S3, produces 28 pears at a sacrifice of just over 9 apples, leaving him with nearly 41 apples. A thus produces only 1 pear for every 7 apples—a result of his being both a man with a weaker taste for pears and a poorer producer of them. B produces just over 7 pears for every 10 apples, the result of both greater liking for pears and greater proficiency in their production.

Common Sense Economics

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