Question

What concept is most important in determining which good a person or nation will specialize in the prodution of?

Answer 1

Opportunity cost is the concept in whose basis a person or a nation decides in which product it will specialise in. This opportunity cost will result in a country having a comparative advantage which is the advantage of having a low opportunity cost in producing a good.

The theory of comparative advantage teaches us that nations should specialise in the production of the goods in which they have the lowest opportunity cost, and trade with other nations.

Specialisation leads to greater economic efficiency and consumer benefits. Whenever a country has a comparative advantage in production it can benefit from specialisation and trade.

However, specialisation can have both positive and negative effects on a nation's economy.

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