Definition of 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
- There is an opportunity cost in the allocation of resources
- When a consumer chooses to purchase a new phone, they may be unable to purchase new jeans. The jeans represent the loss of the next best alternative (the opportunity cost)
- When a producer decides to allocate all of their resources to producing electric vehicles, they may be unable to produce petrol vehicles. The petrol vehicles represent the loss of the next best alternative (the opportunity cost)
- When a government decides to provide free school meals to all primary students in the country, they may be unable to fund some rural libraries which may have to close. The libraries represent the loss of the next best alternative (the opportunity cost)