#economics #opportunitycost

Opportunity cost

Opportunity cost is a very important concept in the study of economics.

Opportunity cost is the cost of the next best opportunity forgone (given up)

when making economic decisions. Every choice made has an opportunity cost

because in most cases there is an alternative.

Some examples of opportunity cost are as follows:

• The opportunity cost of choosing to study IGCSE Economics is another IGCSE

  subject you could be studying instead.

• The opportunity cost of visiting the cinema on Saturday night could be the

  money you would have earned from babysitting for your neighbour instead of

  going to the cinema.

• The opportunity cost of building an additional airport terminal is using the

  same government funds to build public housing for low-income families.

• The opportunity cost of a school purchasing 100 laptops for use in classrooms

  might be the science equipment that could not be bought as a result.

• The opportunity cost of going to university to study for a degree is the loss in

  income that would have been earned if the undergraduate student had chosen

  to work instead.

The influence of opportunity cost on

decision making

Opportunity cost directly infl uences the decisions made by consumers, workers, producers and governments. Referring to the basic economic problem , there are competing uses for the economy’s scarce resources. Thus, there is an opportunity cost when allocating scarce resources.

• Consumers have limited incomes, so whenever they purchase a particular good

  or service, they give up the benefi ts of purchasing another product.

• Workers tend to specialise — for example, as secondary

  school teachers, accountants, doctors and lawyers. By choosing to specialise in

  a particular profession, workers give up the opportunity to pursue other jobs

  and careers.

• Producers need to choose between competing business opportunities. For

  example, Toyota has to decide how best to allocate its research and development

  expenditure in terms of developing its petrol-fuelled cars or its hybrid electric cars.

• Governments constantly face decisions that involve opportunity cost. If

  a government chooses to spend more money on improving the economy’s

  infrastructure (such as improving its transportation and communications

  networks), it has less money available for other uses (such as funding

  education and healthcare).

In general, decision makers will choose the option that gives them the greatest

economic return. For example, a government might prioritise welfare benefi ts over

its expenditure on national defence or repaying the national debt.