International Trade - Theory and Policy, 2010a

Obviously, if aLC∗ < aLC, then France has the absolute advantage in cheese. Also, ifaLW < aLW∗, then the
United States has the absolute advantage in wine production relative to France.
Opportunity Cost
Opportunity cost is defined generally as the value of the next best opportunity. In the context of national
production, the nation has opportunities to produce wine and cheese. If the nation wishes to produce
more cheese, then because labor resources are scarce and fully employed, it is necessary to move labor out
of wine production in order to increase cheese production. The loss in wine production necessary to
produce more cheese represents the opportunity cost to the economy. The slope of the PPF, −(aLC/aLW),
corresponds to the opportunity cost of production in the economy.
Figure 2.2 Defining Opportunity Cost
To see this more clearly, consider points A and B in Figure 2.2 "Defining Opportunity Cost". Let the
horizontal distance between A and B be one pound of cheese. Label the vertical distance X. The
distance X then represents the quantity of wine that must be given up to produce one additional pound of
cheese when moving from point A to B. In other words, X is the opportunity cost of producing cheese.
Note also that the slope of the line between A and B is given by the formula
slope=riserun=−X1.
Thus the slope of the line between A and B is the opportunity cost, which from above is given by
−(aLC/aLW). We can more clearly see why the slope of the PPF represents the opportunity cost by noting
the units of this expression:
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