Is opportunity cost and price of X in terms of Y the same?

[SprinterJr]

I have difficulty undrstanding the statement - "when the price of X in terms of Y is greater than the opportunity cost of Y, we are paying more than it really cost to produce X. In such a case we may say that the economy is inefficient."(Witztum. A, 2005)
This statement was made in relation to a linear PPF, where 100 units of labour was available that can produce either 100 units of good X or 200 units of good Y and of course any feasable combinations of both. There was a point A on the PPF of coordinates (25,150), which represents a productively efficient point and a point B under the PPF of coordinates (25,100) which represents an productively inefficient point. I know that the opportunity cost of X is 2 units of Y and that the opportunity cost of Y is 1/2 unit of X.

My problem come from understanding the price of X in term of Y and the concept of paying more than it really cost to produce X.

Can someone please help me to understand this important concept. Thanks for the help.

[pevdoki1]

Take your numerical example. The price of 25 units of x in terms of y is 50 (this price is dictated by your production capabilities)

To get the opportunity cost of being at point B (in terms of y), ask yourself how many more units of y you could have been producing. The answer is 100 (because you could produce 50 more with the same x, and then 50 more again by decreasing production of x by 25).

Therefore, the opportunity cost of being at point B (in terms of y) is higher than the price of good X.

That said, the definition doesn't quite make sense to me. Actually, opportunity cost of good X in terms of Y is generally defined to be the price X in terms of Y. Maybe someone else can make sense of this.

[jenizaro]

I think it is a typo. Just substitute the first sentence for:

when the price of X in terms of Y is greater than the opportunity cost of X, we are paying more than it really cost to produce X

And it all makes sense. Take "the price of X/Y in terms of Y/X" to mean the technical rate of substitution between X and Y, which is given by the linear PPF.

In B the "price of X in terms of Y" is indeed grater than the opp cost of X because the latter is zero. You can get more of X without sacrificing any of Y. Think of it this way: you haven't allocated all your stock of labor, so you can actually increase production of both goods simultaneously. If you have idle resources, you are obviusly not in an efficient point.

[pevdoki1]

Originally Posted by jenizaro

In B the "price of X in terms of Y" is indeed grater than the opp cost of X because the latter is zero.

This is not correct. With the same resources you used to produce the 25 units of x, you could have been producing 50 units of y, so the opportunity cost of x is clearly nonzero. "There is no free lunch."

[pevdoki1]

accident

[pevdoki1]

accident

[jenizaro]

Originally Posted by pevdoki1

This is not correct. With the same resources you used to produce the 25 units of x, you could have been producing 50 units of y, so the opportunity cost of x is clearly nonzero. "There is no free lunch."

Sure, but what I meant was that in B (i.e., without full utilization of resources), you don't need to give up some Y to get more X.

However, I am not sure if it really makes sense to distinguish between opp cost and price in this context (even when considering idle resources), because though you don't give up present Y, you do sacrifice future Y in choosing to produce more X.

Anyway, I just wanted to propose a plausible interpretation of what the textbook might be trying to say...