Comparing The Production Of Two Producers Overview

In economics, productions across various producers are compared based on how efficiently they can produce individual goods if all resources were allocated towards them. These comparisons can be organized in a table. Below is an example of two firms’ productions being compared through a table:

If both firms allocate all their resources towards producing only toy cars, this table shows that Firm A produces 60 of them, while Firm B produces 50. Otherwise if both firms target all their resources towards producing only toy trains, we see that Firm A can produce 30 of them while Firm B can produce 10. Now using this information, we can determine the opportunity cost per unit for each firm for both goods. So, starting with Firm A, we want to know how many toy trains it will miss out on producing when it produces one toy car. From the table, we can see that Firm A can produce 60 toy cars or 30 toy trains when all the resources are allocated towards each good. Therefore we can set up the following equation:

Next we can divide both sides by 60 to receive the opportunity cost for 1 toy car in terms of toy trains.

This means that the opportunity cost for Firm A of producing 1 toy car is ½ a toy train. In other words, if Firm A produces 1 toy car, they will miss the opportunity to produce ½ a toy train. We can follow a similar procedure to find the opportunity cost for Firm A of producing toy trains. Using the initial equation, we divide both sides by 30 this time to receive the opportunity cost for producing 1 toy train in terms of toy cars.

This means that the opportunity cost for Firm A of producing 1 toy train is 2 toy cars. In other words, if Firm A produces 1 toy train, they will miss the opportunity to produce 2 toy cars. Using the same procedures, the opportunity cost of producing both toy cars and toy trains can each be found for Firm B. These calculations give that the opportunity cost for producing 1 toy car for Firm B is ⅕ toy trains while the opportunity cost of producing 1 toy train for Firm B is 5 toy cars.

We know that a firm’s opportunity cost is important when considering which goods to produce; additionally, opportunity cost can also be useful when considering trades between two firms or two economies. Specifically, opportunity cost can be useful to determine which goods each party in a trading alliance should produce, so that each party can develop a more efficient economy or firm in their production. I will discuss this alternative use of opportunity cost in my article titled, “Comparing Productions Through Absolute Advantage and Comparative Advantage”.