Opportunity Cost in Decision Making (Cambridge (CIE) O Level Economics)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
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)
The Influence of Opportunity Cost on Decision Making
An understanding of opportunity cost may change many decisions made by consumers, workers, firms and governments
Factoring the opportunity cost into a decision often results in different outcomes and a different allocation of resources
Examples of how the Consideration of Opportunity Costs can Change Decisions
Stakeholder | Example |
|---|---|
Consumer |
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Worker |
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Firm |
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Government |
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Examiner Tips and Tricks
Opportunity cost is about the loss of the next best alternative. It is not a monetary amount. MCQ will frequently include a monetary amount as one of the options and it is never the answer! Always look at the options presented and identify the next best alternative
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