The slope of Hugh’s budget line for food and clothing reflects his
opportunity cost of food in terms of clothing. To increase food
consumption while maintaining expenditure constant, Hugh must move
along the budget line and therefore consume less clothing; the slope of
the budget line determines how much clothing he must give up to obtain
an additional unit of food.
The opportunity cost of food in terms of clothing is measured by the (absolute value of the)
slope of the budget line, which is equal to the relative price ratio,In the example, with fixed income and with the relative price of food in
terms of clothing equal to 2, Hugh must give up 2 units of
clothing to be able to purchase 1 extra unit of food. The opportunity cost
of a unit of food is thus 2 units of clothing. Notice that the relative price
(in our example, ) is consistent with an infinite number of
absolute prices. If and it is still necessary to sacrifice 2
units of clothing to acquire 1 unit of food. Thus relative, not absolute,
prices determine opportunity cost.
4 Of course, with a given income, Hugh can afford much less of each product at these higher
money prices, but the opportunity cost of food in terms of clothing remains unchanged.
pF/pC.(pF/pC)pF/pC= 2
pF =$ 40 pC=$ 20 ,
4