Haberler's opportunity cost theory

 

Opportunity cost is the value of loss when choosing between two or more commodities.
     Gottfried Haberler has attempted to restate the comparative costs in terms of opportunity cost. 

      The opportunity cost theory says that if a country can produce either commodity X or Y , the opportunity cost of commodity X is the amount of the other commodity Y that must be given up in order to get one additional unit of commodity X .

The exchange ratio between the two commodities is expressed in terms of their opportunity costs .
The decrease in the quantity of the second commodity represents the opportunity cost of the additional quantity of the given commodity.

Haberler used the concept of opportunity cost with production possibility curves to illustrate international trade theory.

Assumption of habealers opportunity cost theory:

(i) The economic system is in a state of full employment equilibrium.

(ii) There is perfect competition in commodity and factor markets.

(iii) Price of each commodity equals the marginal cost of producing it.

(iv) Price of each factor equals its marginal productivity.

(v) The supply of factors is fixed.

(vi) The state of technology is given.

(vii) There are two trading countries A and B.

(viii) Each country produces two commodities, say X and Y.