A Capitalist Manifesto by Wolfram Gary

Author:Wolfram, Gary [Wolfram, Gary]
Language: eng
Format: mobi
ISBN: 9780965604086
Publisher: Dunlap Goddard
Published: 2012-11-26T16:00:00+00:00

Opportunity Cost of Home Improvements

Person

Painting

Wallpapering

Me

2/3 W

1 1/2 P

You

3/4 W

1 1/3 P

Table 13-1

Since the opportunity cost to me of painting is less than it is for you, and the opportunity cost of wallpapering is less for you than it is for me, I should specialize in painting and you should specialize in wallpapering. The intuitive reason is that although I am more efficient than you at both things, my efficiency advantage is greatest at painting. Because I am so good at painting, it costs me more to do something other than paint than it costs you. While I have an absolute advantage over you in both painting and wallpapering, I only have a comparative advantage over you in painting.

Notice that the opportunity cost to you of wallpapering is smaller than it is for me. Although it takes you longer to wallpaper than it does me, you give up less painting when you wallpaper than I do when I wallpaper. Your opportunity cost of a unit of wallpapering is one and one-third units of painting while mine is one and one-half units.

Let’s see how this example works to make us both better off. Suppose that I follow the first route and decide to be a self-sufficient homeowner, painting my own bedroom and wallpapering my own bathroom. It would take me a total of five hours. Since I won’t trade services with you, you are forced to paint and wallpaper your own home as well, taking seven hours. It takes us a total of twelve hours to get ready for the Super Bowl.

Instead, suppose we are armed with the knowledge of comparative advantage. You could wallpaper for seven hours. This is the same amount of time that you would have spent doing your home by yourself. In this time you will have completed your home and three-fourths of mine. I paint both of our houses, taking four hours, and finish the one-fourth of my wallpapering job. The wallpapering will take me three-fourths of an hour. As it takes me three hours to wallpaper one full bathroom, it will take me three-fourths of an hour to do one-fourth of the job. By working together we have saved fifteen minutes of labor, since you work a total of seven hours and I work a total of four and three-quarter hours. While fifteen minutes may not sound like it was worth all the bargaining necessary to make our deal, when the principle is applied to millions of workers doing millions of different jobs, the savings are enormous.

“But wait a minute!” you might say after thinking about this for a minute. “Why did you get all the benefit of this?” Only because I have made you a poor bargainer in setting the terms under which we traded labor. In practice, the traders will determine at what rate they are willing to trade in order to share the extra fifteen minutes. You might work a little less than seven hours and I work a little more than four and three-quarter hours.

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