ABSTRACT
The neoclassical theory of international values is based on the fundamental concepts of opportunity cost and social indifference. It is an improvement over the classical theory because it frees the classical conclusions from the restrictive assumption of the labor theory of value. This chapter discusses at some length the concept of opportunity cost. Each isocost line shows the alternative combinations of labor and land which can be purchased with a fixed sum of money. The long-run industry supply curve is horizontal at the level of the minimum average cost of production, and the long-run equilibrium price is necessarily equal to this minimum average cost. In other words, given any combination of factor prices, the optimum combination of labor and land that each and every firm will be using can be determined under conditions of long-run equilibrium. Under competitive conditions, the marginal rate of transformation shows relative commodity prices.
