Let us define the concept of opportunity cost first.

In the context of productio

n,
the opportunity cost of producing a commodity (say X), is the quantity of anoth
er commodity (say Y),
that must be sacrificed to produce one additional unit of X. According to the op
portunity cost theory,
a country with lower opportunity cost for a commodity has a comparative advantag
e in that commodity and a comparative disadvantage in the other.
In his opportunity cost theory of international trade, Haberler has opposed Rica
rdo's restrictive premise of labour theory of value.
He has done this in favour of a more general framework without otherwise changin
g Ricardo's basic argument.
'The opportunity 'cost theory of trade states that, it is the differences betwee
n costs which determine the relative prices of different commodities.
Here, the term 'cost' does not refer to the amount of labour required to produce
a particular commodity, but to the amount of alternative good that has to be
forgone to produce that commodity. Stated differently, the value of each commodi
ty is taken to be equal to its opportunity cost.


The Opportunity Cost Doctrine
A Marginal Revolutionary
________________________________________________________

"If costs are stated in terms of alternative commodities and all reference eithe
r to "sacrifice" or "outlays" simply omitted, we retain the scientific content o
f cost of production theory while side-tracking the sources of a century and a h
alf of controversy."
(Frank H. Knight, Journal of Political Economy, 1928: p.355).
________________________________________________________
Contents
(A) Opportunity Cost
(B) The Austrian-Marshallian Debate
Selected References
Back

(A) Opportunity Cost
Philip H. Wicksteed's (1910, 1914) depiction of "demand-and-supply" in pure exch
ange was geared to demonstrate the supremacy of the Austrian alternative cost (o
r opportunity cost or displacement cost) doctrine over the Marshallian real cost
(or disutility cost or pain cost) doctrine.
The concept of opportunity cost can be found in the works of many early economis
ts (e.g. J.H. von ThEen, 1823; J.S. Mill, 1848; and, most notably, L. Walras, 187
4), yet the opportunity cost doctrine was only explicitly introduced as an all-e
ncompassing theory of cost in a seminar paper by Friedrich von Wieser (1876) and
expounded in his later books (Wieser, 1884, 1889). It was quickly embraced by f
ellow Austrian economists such as Eugen von Bhm-Bawerk (1889, 1894), Paul Rosenst
ein-Rodan (1927) and, notably, Gottfried von Haberler (1930, 1933). The alternat
ive cost doctrine was popularized in the English-speaking world by D.L. Green (1
894), Frank A. Fetter (1904), Herbert J. Davenport (1908, 1913), Philip H. Wicks
teed (1910, 1914), Frank H. Knight (1921, 1928) and Lionel Robbins (1930, 1932,
1934).
The Austrian opportunity cost doctrine is simple enough to explain: it boils dow
n to claiming that relative prices reflect foregone opportunities. In terms of p
ure exchange, this is easy: for agent h, the cost of demanding D 1h units of goo
d x1 is the offer of O2h units of good x2 he has to make. Thus, the price of goo
d x1 in terms of x2 is the amount of good x2 that has to be offered (and thus fo
regone) to obtain a unit of good x1, i.e.
p1/p2 = O2h/D1h
So, for example, if to obtain 5 units of good x1, agent h needs to give up 15 un
its of good x2, then the price of good x1 in terms of x2 is 3. As market prices
reflect the trade-off between goods a consumer faces, then perhaps we can be a b
it more precise by analyzing it at the infinitesimal margin rather than taking c
lunky increments of net demands and offers. Doing so, we will find it is more co
nvenient to simply write that, at the margin:
p1/p2 = -dx2h/dx1h
where dx1 is an infinitesimal net demand for good x1 and -dx2 is the correspondi
ng offer. This was baptized by John Hicks (1939) as as the marginal rate of subs
titution between x1 and x2 The rest is well-known: the hedonistic, rational cons
umer will choose net demand and offers where -dx2h/dx1h = u1h/u2h, where u1h = uh
/x1 is the marginal is the marginal utility of good x1h and u2h = uh/ x2h is the
marginal utility of good x2. So:
"The ratio of exchange of any two commodities will be the reciprocal of the rati
o of the final degrees of utility [i.e. ratio of marginal utilities] of the quan
tities of the commodity available for consumption after exchange is completed."
(W.S. Jevons, 1871: p.95).
This has been baptized by Maffeo Pantaleoni (1889: p.184) as "Wieser's Law".
All this is well-known and pretty much accepted by all modern Neoclassical econo
mists. Why the fuss? The fuss arises when we consider the opportunity cost princ
iple in the context of production. Suppose we have two goods, x1 and x2, but onl
y one factor (call it v). Suppose that a unit of the factor can produce a unit o
f good x1, while a unit of the factor can produce two units of good x2. Conseque
ntly, in order to produce one unit of good x1, one foregoes the production of tw
o units of x2; simlarly, to produce one unit of x2, one foregoes a half-unit of
x1. Thus, in opportunity cost terms, x1 = 2x2 and x2 = x1/2. If prices must equa
l opportunity cost, then notice that it must be that p1/p2 = 2.
Now, suppose output prices such that p1/p2 = 3, i.e. a unit of x1 sells for 3 un
its of x2. In this case, a smart agent would try to produce an enormous amount o
f x1 and exchange it all for x2. For each unit of x1 produced, he receives 3 uni
ts of x3, thus he makes a "profit" of one unit of x3. Conversely, a stupid agent
who specialized in the production of x2, would need to produce three units of x
2 in order to acquire a unit of x1. Yet, if he simply modified his production pr
ocess and produced the other good instead, he would be able to obtain 1.5 units
of x1 by producing it using the same factors it would take to acquire 1 unit of
x1 on the market. Thus, if output price ratio p1/p2 is greater than the opportun
ity cost of good x1 in terms of x2, then we would expect everyone to produce x1
and nobody to produce x2. Similarly, if p1/p2 is less than the opportunity cost,
we would expect nobody to produce x1 and everybody to produce x2.
There might be a slight twinge in the heart of a true Neoclassical: it seems as
if prices are determined "objectively" by opportunity costs; where does subjecti
ve things like utility and thus demand come into play as the determinant of pric
e? The truth of the matter is that we have not necessarily established that outp
ut prices must equal opportunity costs in our example. In order to obtain price-
opportunity cost equality, we must actually go to a wider example, one which use
s at least two different factors (e.g. capital and labor) in the production of b
oth goods x1 and x2.
To see why, consider Figure 1, where have drawn two production possibilities fro
ntiers, PPF (straight line) and PPF (bowed out from the origin) (the production p
ossibility frontier is originally due to Abba Lerner (1932) and Gottfried von Ha
berler (1933: p.176)). The bowed-out shape of PPF reflects the fact that the prop
ortion in which factors are released when reducing the production of good x1 are
different from the proportions in which they are absorbed when increasing the p
roduction of good x2. In our earlier example, there was only one factor (v), and
two outputs. Thus, when moving from the production of x1 to x2, the factor was
absorbed in the same proportion as it was released, thus the relevant production
possibilities frontier would be the linear PPF in Figure 1.
ppf.gif (4366 bytes)
Fig.1 - Production Possibilities Frontiers
The slope of any PPF is the opportunity cost of x1 in terms of x2. In the linear
case of only one factor, the slope is constant -- in our example, simply -2. Th
us, the linear case which is obtained when we have only one factor and two outpu
ts is often referred to as the constant cost case.
In the concave PPF case, the opportunity cost changes as we change combinations o
f x1 and x2 produced. Specifically, the concave shape of PPF indicates that the m
ore that is produced of good x1, the more and more we have to give up of x2, i.e
. the greater the opportunity cost of x1 in terms of x2. Intuitively, this refle
cts, as Joan Robinson aptly put it, that "an increase in the output of any commo
dity turns the relative factor prices against itself" (Robinson, 1941). In a gen
eral context, if x1 is relatively intensive in capital and x2 is labor intensive
, then as we move towards greater output of x1 and less of x2 (e.g. points e to
f in Figure 1), the tighter the capital market becomes and the looser the labor
market gets. Thus, as we increase x1 the price of capital rises relative to labo
r so that it becomes costlier and costlier to produce more x1.
We can now see where demand begins to play a role. Consider first the linear cas
e. Suppose conditions in the output market are such that p1/p2 = 2 is the output
price. In this case, the entire linear PPF locus denotes the output combination
s of x1 and x2 that will ensue. In other words, positions c = (x1c, x2e) and d =
(x1d, x2f) in Figure 2 are equally possible. Obviously, then, the output level
is indeterminate.
If, however, output prices are such that p1/p2 > 2, then we have determinacy of
an extreme sort: we will go to the corner solution x1m, where all factors are de
dicated to the production of x1 and none for x2. If p1/p2 < 2, we go to the othe
r corner, x2m, and produce nothing of x1 and as much as possible of x2. These ex
tremities were already alluded to earlier in our earlier linear example. Note th
at in these extreme cases, prices are not necessarily equal to costs.
The linear or constant cost case reflects exactly Adam Smith's famous example in
his Wealth of Nations:
"If among a nation of hunters, for example, it usually costs twice the labour to
kill a beaver which it does to kill a deer, one beaver should naturally exchang
e for or be worth two deer. It is natural that what is usually the produce of tw
o days or two hours labour, should be worth double of what is usually the produc
e of one day's or one hour's labour."
(A. Smith , 1776: p.65).
Notice the crucial importance that Smith's example has two outputs (beaver and d
eer) and one input (labor), thus implying that we must necessarily have a linear
PPF as in Figure 1. As insisted by Knight (1928), Smith's argument that exchang
e values reflect relative labor costs can be reintrepreted in opportunity cost t
erms: a deer is worth two beaver not because of the fact that labor is involved,
but rather because the cost of catching a deer were the two beavers that could
be alternatively caught: "the cost of beaver is deer and the cost of deer is bea
ver, and that is the only objective and scientific content of the cost notion".
(F.H. Knight, 1928).
Smith's assertion that prices equal relative labor costs (or, in Knightian inter
pretation, opportunity costs), implies that he is ruling out the corner solution
s x1m and x2m in Figure 1, and thus the only thing that remains is that p1/p2 =
2, thus making demand irrelevant for the determination of prices. In such a case
, prices are completely determined by the "objective" relative costs of producti
on of beaver and deer. Note that, in this case, relative output levels are indet
erminate, or rather must be determined by something else - exactly as the Classi
cal theory argues they should be.
Suppose, however, that we have two inputs and two outputs, so that we obtain the
concave PPF in Figure 1. If prices are (p1/p2)*, then the price line will be tan
gent to PPF at point e = (x1e, x2e). Equivalently, if prices are (p1/p2) , then th
e price line will be tangent to PPF at point f = (x1f, x2f). These are, in fact,
the only efficient combinations of outputs corresponding to the relevant price r
atio. Thus, output price are equal to opportunity costs, and yet utility-based d
emand, which helps determine output price, is really the main determinant of eve
rything. Thus, Wieser's "Neoclassical" twist on the old Smithian cost theory see
ms to reduce itself to changing the technology of the system.
Why would we necessarily produce at e in Figure 1 if prices were (p1/p2)*? Suppo
se not. Suppose we chose f instead at those prices. If so, then output prices ar
e lower than the opportunity cost of x1 in terms of x2 implied by the slope of P
PF at point f . This would lead to the kind of instability we saw earlier: people
would move away from the production of x1 and towards the production of x2, i.e.
driving us right back up the PPF curve to point e.
In sum, when viewed from the prism of opportunity costs, output prices must equa
l opportunity costs and thus it seems as if prices are governed by the "objectiv
e" phenomena of opportunity cost. But a more careful look indicates that it is d
emand, with its influence on output prices, that determines which opportunity co
sts are to prevail. Thus, prices and outputs, everything else are subjectively d
etermined. In short, the opportunity cost doctrine is an "objective theory of va
lue which is subjective". We find this stated clearly in Wieser:
"The phenomena of [alternative] costs are, therefore, a new proof of how greatly
the objective conditions of the existence of goods influence the value of goods
. How far the value of goods, in its final form of "cost value", is from being t
he mirror of that subjective fact from which it is derived -- the value of wants
! The circumstance that cognate products are produced by different quantities of
the same productive elements, brings their subjective valuations into a ratio,
the terms of which are derived entirely from the objective conditions of product
ion; while the impulses which call for their emergence...remain subjective, and
thus prove the subjectivity of the source and nature of value."
(F. von Wieser, 1889: p.185)
and even more clearly in Knight:
"When any two commodities can be produced with the aid of the same resources of
whatever sort, freely transferable from one use to the other, the prices of thos
e commodities must in equilibrium be such that the alternative products of the s
ame or equal units of resources exchange for each other. Price is determined by
cost rather than utility, but by cost in a physical technical sense, not that of
pain or sacrifice...Comparisons of sacrifice, however, may be and commonly are
involved in greater or lesser degree, and the operation of the utility principle
is the basis of the whole process of adjustment. This is the alternative cost t
heory which is definitely the product of the utility approach."
(F.H. Knight, 1931)
What about factors of production? These are governed by the Austrian principle o
f imputation (due to Carl Menger (1871) and Friedrich von Wieser (1889)): given
output prices, we can determine what the factor prices will be. More specificall
y, a given point on the production possibilities curve will determine a particul
ar division of factors between industries which, in turn, will determine the pro
portional factor prices (for a demonstration of this, see our survey of Paretian
general equilibrium theory).
One can go on with the exploitation of opportunity cost idea. As demonstrated fa
mously by Gottfried von Haberler (1933), the principle of comparative advantage
in international trade can be couched in opportunity cost terms. To see this con
sider the following simple linear example. Suppose there are two agents (A and B
), each of which is endowed with an hour of labor which can be spent either on r
abbit-hunting or deer-hunting. In one hour, A can catch 5 rabbits or 1 deer whil
e B can catch 20 rabbits or 2 deer (they can do a little bit of both, but they e
ach only have an hour to spend). Notice that B is more efficient at catching bot
h rabbits and deer than A is, thus B has an absolute advantage in the production
of both goods. The opportunity costs faced by agent A are easily computed: the
opportunity cost of a deer is 5 rabbits, or, equivalently, the opportunity cost
of a rabbit is 1/5 of a deer. For agent B, the opportunity cost of deer is 10 ra
bbits or, conversely, the opportunity cost of rabbit is 1/10 of a deer.
Haberler argues that an agent has a comparative advantage in a good if he has a
lower opportunity cost in that good. In this example, as is obvious, agent A has
a lower opportunity cost (and thus a comparative advantage) of catching deer, w
hile B has a lower opportunity cost (and thus a comparative advantage) of catchi
ng rabbits (in general, in any two-good, two-agent scenario, it will always be t
he case that if one agent has a lower opportunity cost in one thing, the other a
gent will necessarily have a lower opportunity cost in the other).
Consequently, if specialization is to ensue according to the principle of compar
ative advantage, agent B should dedicate her entire hour to catching rabbits (20
of them), while agent A should dedicate his hour to catching deer (1 of them).
They can then trade. Suppose B offers A six rabbits in exchange for the entire d
eer A has caught: such an offer can be made by B and will be accepted by A becau
se both will better off as a result. To see this, note that after trading, A wil
l have six rabbits (while before the trade, the best he could do was 5 rabbits).
In contrast, after trading, B will have 1 deer and 14 rabbits (before trade, th
e best she could do was 1 deer and 10 rabbits). Thus, after specializing and tra
ding, A is better off by a rabbit while B is better off by four rabbits.
(B) The Austrian-Marshallian Debate

Alfred Marshall was a compromiser: he did not consider the Marginalist Revolutio
n of 1871-4 to be a complete repudiation of the Classical doctrines of Smith, Ri
cardo and Mill. Instead, Marshall believed in the continuity between Classical a
nd Neoclassical economics; that both theories, in the end, agreed that equilibri
um prices were determined by demand and supply, but that each of them had been t
oo "one-sided" about it. In particular, Marshall (1890: App.I) argued that the s
ole fault of the Classicals was that they concentrated too much on supply as a d
eterminant of price and thus tended to ignore or understate the role of demand;
in contrast, the fault of William Stanley Jevons and other Marginalists was that
they concentrated far too much on demand and had ignored supply. Thus, he goes
on to conclude, the Marginalist Revolution is less revolutionary that it makes i
tself seem: supply is determined by cost of production in the Ricardian fashion,
demand is determined by utility in the Jevonian fashion, place both together an
d we have the determination of equilibrium price. As Marshall famously writes:
"We might as reasonably dispute whether it is the upper or the lower blade of a
pair of scissors that cuts a piece of paper, as whether value is governed by uti
lity or cost of production. It is true that when one blade is held still, and th
e cutting is effected by moving the other, we may say with careless brevity that
the cutting is done by the second; but the statement is not strictly accurate,
and is to be excused only so long as it claims to be merely a popular and not a
strictly scientific account of what happens."
(A. Marshall, 1890: p.290)
The fact that Marshall was English and that the Marginalist Revolution was large
ly of Continental derivation may have had something to do with his reluctance to
abandon the English Classical tradition. The convese fact that the Austrians we
re Continental Europeans may also have had something to do with their keen inter
est in debunking Ricardo and Mill. Whatever the reason, Marshallians and Austria
ns came to loggerheads over the "ultimate" determinant of value.
The Austrians and their allies did not dispute that there were "two blades to th
e scissors" in the determination of price in any one market; instead, they dispu
ted Marshall's assertion that supply was determined by "cost of production". As
Wicksteed (1910, 1914) so clearly demonstrated, viewed from the prism of opportu
nity cost, "supply is reverse demand". Thus:
"The only sense, then, in which cost of production can affect the value of one t
hing, is the sense in which it is itself the value of another thing. Thus, what
has been variously termed "utility", "ophelimity", or "desiredness", is the sole
and ultimate determinant of all exchange values"
(P.H. Wicksteed, 1910: p.391).
The Marshallians, notably Francis Y. Edgeworth (1894) and Jacob Viner (1932, 193
7) took exception to the assertion that all cost was opportunity cost. What they
noted was in fact, quite simple: if to acquire anything, one must "give up" som
ething else, then we are effectively implying that there is ultimately a "fixed"
amount of everything. But this, the Marshallians noted, is not necessarily true
. Resources, they argued, can be regarded as fixed "in the short-run". But in th
e "longer run", more resources can be made available. For instance, capital may
be built; labor can be increased, etc.
A great amount of ink was spent particularly on labor supply. Labor supply, the
Marshallians claimed, was rather flexible. Increase the payments to labor, and "
more" would be supplied. Consider the production of, say, scissors. As the outpu
t of scissors increases, costs of production increase because higher wages must
be paid to labor to induce them to increase their supply. These are not, the Mar
shallians asserted, "opportunity costs", but "real costs": they compensate labor
ers for the "disutility" of work (a concept originally introduced by Jevons (187
1: Ch. Ch.5)).
The Austrians were not caught off-guard by these examples. The resolution to the
"alternative cost" vs. "real cost" dispute is readily apparent: what is the "di
sutility of labor" other than "displaced leisure"? Labor supply may be flexible,
but time is fixed and so the worker must choose between work and leisure. Wages
are paid not because producers must compensate workes for the "irksomeness" of
labor, but rather because they must compensate laborers for foregoing leisure. T
hus, Marshallian real costs are reducible to Austrian opportunity costs.
[Note: in a moment of doubt, Frank Knight (1934) poses the question whether oppo
rtunity cost captures the idea that wages in agreeable jobs are lower than wages
in irksome jobs? The resolution here is even simpler if we consider the jobs an
d their irksomeness/agreeableness to be joint goods: the higher wages paid to th
e laborer in the "irksome job" does not compensate for greater disutility of tha
t job, but rather for the displaced "agreeable job".]
[Another note: the alternative cost-real cost debate flared up with particular v
ehemence in international trade theory, pitting the Austrian economist Gottfried
von Haberler (1930, 1933: Ch. 12; 1951) versus real-cost advocate Jacob Viner (
1932, 1937: Ch. 7), and seems to have lingered on for a while in that area. For
a modern restatement and resolution in this context see Vanek (1959).]
In reducing the Marshallian examples of real costs to opportunity costs, the Aus
trians may seem to have won the upper hand, but they were forced to admit one th
ing: namely, that in the end, for this reduction to be possible, one must impose
the assumption that something is fixed in availability which cannot be increase
d. In our labor example, time was fixed; if time was "extendable" by some way or
another, the opportunity cost doctrine would collapse once again. Thus, the Aus
trians recognized that for the opportunity cost doctrine to work, there must alw
ays be a fixed stock of everything.
In sum, with their examples, the Marshallians demonstrated time and time again t
hat the opportunity cost doctrine relies on fixed resources. As such, the Marsha
llians crowed that the opportunity cost doctrine must necessarily be a "special
case". When resources are fixed, then indeed "the ultimate standard of value", t
o use Bhm-Bawerk's term, is opportunity cost, but when resources are flexible, th
ey argued, Marshallian theory comes into its own.
We find some proponents of the alternative cost doctrine, such as Frank H. Knigh
t (1934) and Lionel Robbins (1930, 1934), a bit troubled by the prospect of flex
ible resources. In terms of our earlier Figure 1, what will be the prices when t
he PPF is allowed to move around? However, their resolution was not to rethink t
he theory of costs to accommodate flexible resources but rather to claim that an
y economic problem is always ultimately characterized by fixed resources. This w
as particularly emphasized by Lionel Robbins in his famous Essay on the Nature a
nd Significance of Economic Science (1932). Economics, he insisted, is exclusive
ly concerned with scarcity: "Economics is the science which studies human behavi
our as a relationship between ends and scarce means which have alternative uses.
" (Robbins, 1932: p.16).
Robbins's limitation of the scope of economics to the issue of allocation of fix
ed resouces was a wildly successful coup and summarized quite well the full mean
ing of the Marginalist Revolution. Value, as Jevons, Walras, Menger and virtuall
y every Neoclassical since has asserted, derives from scarcity and scarcity cann
ot arise unless resources are fixed in one way or another. The entire Walrasian-
Paretian general equilibrium edifice clearly stands only (and thus perhaps uneas
ily) on this concept. Of course, the Marginalists also noted that it is not enou
gh that something is fixed in availability in order to have value; it must also
be desired, i.e. scarcity is subjective. If value is derived from scarcity, then
value is merely "the phenomena of demand acting on fixed stocks -- either of pr
oducts, or factors or time -- or human capacity." (Robbins, 1933).
It is evident that Robbins's reasoning is a bit circular. He claims that if some
thing is not scarce, it does not have value and thus is not an economic concern.
Thus, economics necessarily deals only with the allocation of fixed resources.
However, we only obtain the conclusion that value derives from scarcity if we as
sume there are fixed resources. But the Classical economists - Smith, Ricardo, M
ill, etc. - would dispute this vehemently. For Classicals, at least since Cantil
lon, economics is about finding the rates of exchange between goods and the divi
sion of income between factors such that the economy can maintain a balanced cir
culation of goods and incomes. This is not about the "allocation of fixed resour
ces": in Classical economics, all resources (labor and capital) are endogenous a
nd thus not scarce over time. Yet the absence of scarcity does not stop the Clas
sicals from deriving the "value" of goods quite explicitly, as was demonstrated
with remarkable virtuosity by Piero Sraffa (1960).
In sum, the alternative cost-real cost dispute between the Austrians and Marshal
lians can only be said to have been resolved in favor of the Austrians if the ba
sic premise of the Marginalist Revolution, that value derives from scarcity, is
held to be true. Thus, the main contribution of the alternative cost debate was
that it clarified what was the essence of the Marginalist Revolution of 1871-4 a
nd to re-assert its fundamental message: that value is subjective (i.e. derived
from scarcity) and not objective (i.e. from the need to maintain balanced circul
ation). Viewed from this vantage point, Marshall's musings are somewhat misleadi
ng: yes, Virginia, there was a Marginalist Revolution and it was very revolution
ary indeed.
[Note: some commentators (e.g. Robbins, 1930) have argued that, underneath it al
l, Alfred Marshall held a theory of value which is closer in spirit to the Class
ical notion of balanced circulation than the Neoclassical one of scarcity. If on
e did make the argument the Marshall's "long-run" theory (flexible resources) is
Classical, while his "short-run" theory (fixed resources) is Neoclassical, one
could plausibly argue that then demand-and-supply determine prices only in the s
hort-run, and not the long-run. Yet this would immediately remove Marshall from
the Neoclassical pantheon: the argument that supply-and-demand determine exchang
e values only in the short-run is not novel, but taken right out of Ricardo and
Mill! More acute attempts to account for Marshall's theory of value without sacr
ificing his Neoclassical credentials are found in Ragnar Frisch (1950) and Peter
Newman (1960).]
Selected References

E. v. Bhm-Bawerk (1889) Capital and Interest: Volume II - Positive Theory of Capi
tal. 1959 translation, South Holland, Ill: Libertarian Press.
E. v. Bhm-Bawerk (1894) "The Ultimate Standard of Value", Annals of the American
Academy, Vol. V, p.149-208.
J.M. Buchanan (1969) Choice and Cost: A inquiry in economic theory. Chicago: Mar
kham.
H.J. Davenport (1908) Value and Distribution. Chicago.
H.J. Davenport (1913) The Economics of Enterprise. New York.
F.Y. Edgeworth (1894) "Professor Bhm-Bawerk on the Ultimate Standard of Value", E
conomic Journal, Vol. 4, p.518-21. Reprinted in Papers Concerning Political Econ
omy, Vol. III, p.59-64. London: Macmillan.
F.A. Fetter (1904) Principles of Economics, 1911 edition, New York: Century.
R. Frisch (1950) "Alfred Marshall's Theory of Value", Economic Journal, Vol. 64,
p.495-524.
D.L. Green (1894) "Opportunity Cost and Pain Cost", Quarterly Journal of Economi
cs, Vol. 218-29.
G. v. Haberler (1930) "Die Theorie der komparativen Kosten und ihre Auswertung fE
die BegrEdung des Freihandels", Weltwirtschaftliches Archiv, Vol. 32, p.353-70.
G. v. Haberler (1933) The Theory of International Trade: with applications to co
mmercial policy. 1936 translation, New York: Macmillan.
G. v. Haberler (1951) "Real Cost, Money Cost and Comparative Advantage", Interna
tional Social Science Bulletin, p.54-58.
Lewis H. Haney (1912) "Opportunity Cost", American Economic Review, Vol. 2 (2),
p. 590-600
W.S. Jevons (1871) The Theory of Political Economy. Reprint of 1931 edition, Cha
rlottesville, Virginia: Ibis.
F.H. Knight (1921) Risk, Uncertainty and Profit. 1933 reprint, London: L.S.E.
F. H. Knight (1928) "A Suggestion for Simplifying the Statement of the General T
heory of Price", Journal of Political Economy, Vol. 36 (3), p.353-70.
F.H. Knight (1931) "Marginal Utility Economics", in E.R.A. Seligman, editor, Enc
yclopaedia of the Social Sciences, Vol. V, p.357-63. Reprinted in Knight, 1935,
The Ethics of Competition: And other essays. 1951 edition, New York: A.M. Kelley
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Opportunity Cost Theory

One of the main drawbacks of the Ricardian comparative cost theory was that it w
as based on the labour theory of value which
stated that the value or price of a commodity was equal to the amount of labour
time going into the production of the commodity.
Gottfried Haberler gave new life to the comparative cost theory by restating th
e theory in terms of opportunity costs in 1933.
The opportunity cost of a commodity is the amount of a second commodity that mus
t be given up in order to release
just enough factors of production or resources to be able to produce one additi
onal unit of the first commodity.
For example, suppose that the resources required to produce one unit of commodit
y X are equivalent to the resources required to produce 2 units of commodity Y.
Then, the opportunity cost of one unit of X is two units of Y.
According to the opportunity cost theory, a nation with a lower Opportunity cost
for a commodity has a
comparative advantage in that commodity and a comparative disadvantage in the o
ther commodity,
Suppose that the Opportunity cost of one unit of X is 2 units of Y in country A
and 1.5 unit of Y in country B.
Then country A must specialise in production of Y and import its requirements of
X from B,
and B should specialise in the production of X and import Y from A rather than p
roducing it at home.