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 ti get that item. In our example we assumed that the farmer and the rancher each spend 8 hours a day working. Time spent producing potatoes therefore takes away from time available for producing meat. As the rancher and farmer reallocate time between producing the two goods, they move along their production possibility frontiers they give up units of one good to produce units of the other. The opportunity cost measures the trade-off between the two goods that each producer faces.

Let’s first consider the rancher’s opportunity cost. According to Table 1, producing 1 ounce of potatoes takes 10 minutes of work. When the rancher spends those 10 minutes producing potatoes, she spends 10 minutes less producing meat. Because the rancher needs 20 minutes to produce 1 ounce of meat. 10 minutes of work would ½ yield ounce of meat. Hence the rancher;s opportunity cost of producing 1 ounce of potatoes is ^1/2ounce of meat.

Now consider the farmer’s opportunity cost. Producing 1 ounce of potatoes takes him 15 minutes. Because he needs 60 minutes to produce 1 ounce of meat, 15 minutes of would yield ¼ ounce of meat. Hence, the farmer’s opportunity cost of 1 ounce of potatoes is ¼ ounce of meat.

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