Business Choices (Edexcel A Level Business)

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 business decides to allocate all of its resources to producing electric vehicles, it 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)

Business Choices & Potential Trade-offs

• An understanding of opportunity cost may change many decisions made by businesses

• Factoring the opportunity cost into a decision often results in different outcomes & so a different allocation of resources

• A trade-off occurs when two things cannot be fully achieved

  • Having more of one thing may mean having less of another

Examples of Potential Trade-offs