OPPORTUNITY COST AND COMPARATIVE ADVANTAGE

OPPORTUNITY COST AND COMPARATIVE ADVANTAGE
There is another way to look at the cost of producing potatoes. Rather than comparing
inputs required, we can compare the opportunity costs. Recall from Chapter
1 that the opportunity cost of some item is what we give up to get that item. In
our example, we assumed that the farmer and the rancher each spend 40 hours a
week working. Time spent producing potatoes, therefore, takes away from time
available for producing meat. As the rancher and farmer change their allocations
of time between producing the two goods, they move along their production possibility
frontiers; in a sense, they are using one good to produce the other. The opportunity
cost measures the tradeoff that each of them faces.
Let’s first consider the rancher’s opportunity cost. Producing 1 pound of potatoes
takes her 8 hours of work. When the rancher spends that 8 hours producing
potatoes, she spends 8 hours less producing meat. Because the rancher needs only
1 hour to produce 1 pound of meat, 8 hours of work would yield 8 pounds of meat.
Hence, the rancher’s opportunity cost of 1 pound of potatoes is 8 pounds of meat.
Now consider the farmer’s opportunity cost. Producing 1 pound of potatoes
takes him 10 hours. Because he needs 20 hours to produce 1 pound of meat, 10
hours would yield 1/2 pound of meat. Hence, the farmer’s opportunity cost of 1
pound of potatoes is 1/2 pound of meat.