The Concept of Opportunity Cost (Cambridge International IGCSE Economics)

Defining opportunity cost

Spec point — "Defining opportunity cost examples of opportunity cost in different contexts"

Defining opportunity cost

• Opportunity cost is the loss of the next best alternative when making a decision
• Due to the problem of scarcity, choices have to be made about how to best allocate limited resources amongst competing wants and needs

Examples of opportunity costs

Consumers

• Choosing between spending on a new phone or saving for a holiday

• Going to university or entering employment straight after school

  • The forgone income = opportunity cost

Workers

• Choosing a job with higher pay versus a role with better work-life balance

  • The opportunity cost = non-monetary benefits like time or health

Producers/firms

• Using land to grow wheat versus renting it out for wind farming
• Producing product A over product B due to limited factory capacity

Governments

• Spending on education rather than healthcare
• Building roads versus subsidising renewable energy

The influence of opportunity cost on decision-making

Spec point — 1.3.2 · "The influence of opportunity cost on decision-making: decisions made by consumers, workers, producers/firms and governments when allocating their resources"

The influence of opportunity cost on decision-making

• Each economic agent weighs what they gain against what they must give up
• When opportunity cost is properly considered, the decision often changes, leading to a more efficient or personally valuable outcome

Consumer

• Ashika wants to visit her best friend in Iceland
• She finds flights from London to Reykjavík: £120 on Friday night, £50 on Thursday night
• She is about to book the Thursday flight, but realises the opportunity cost of saving £70 is missing a full day of work, which would lose her £130 in income

Worker

• Ric is choosing between two jobs
• Job A pays £400 more per month but requires daily commuting. Job B pays less but allows him to work from home
• Commuting would cost Ric £40 per week in expenses and around £180 per week in lost time, which he personally values highly

Firm

• A firm that sells organic avocados is offered a contract by a large supermarket to buy all of its stock monthly at a low price
• The supermarket is prestigious, but the price offered is lower than what existing customers pay

Government

• The Australian Government agrees to supply France with submarines for $70 billion
• Later, the USA offers a similar deal and pressures Australia to cancel the French contract
• The government considers the opportunity cost of damaging trade and diplomatic relations with the USA