Chapter 3

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Opportunity cost
Learning objectives
By the end of this chapter you will be able to:
■ define opportunity cost
■ give examples of opportunity cost in different contexts
■ explain the influence of opportunity cost on the decision making of consumers, workers,
producers and governments

Introducing the topic

There are many subjects that schools could teach. For example, Cambridge International
Examinations offers more than 70 subjects at IGCSE. Each school offers only a proportion
of the subjects on offer. Why is this? It is because schools do not have enough classrooms,
teachers and equipment to teach all subjects, for example a classroom can be used to teach
English or economics in the same room, but not at the same time.
There are not enough economic resources to produce all the goods and services we would
desire, as we saw in Chapter 1. Land, labour, capital and enterprise are scarce and so
decisions have to be made about the method and purpose of their use. In deciding what
to use the classroom for, and in making other decisions, the concept of opportunity cost is
important.
 Chapter 3: Opportunity cost

3.1 The meaning of opportunity cost

When we decide to do one thing, we are deciding not to do something else. To ensure that we
make the right decisions, it is important that we consider the alternatives, particularly the best
alternative. Opportunity cost is the cost of a decision in terms of the best alternative given KEY TERM
up to achieve it, for example there are a variety of things you could do tomorrow between
Opportunity cost:
5 pm and 6 pm. These may be to go shopping, to read a chapter of an economics book, to do
the best alternative
some paid work or to visit a friend. You may narrow those choices down to reading the chapter forgone.
or visiting a friend. You will have to consider very carefully which one will give you the best
return. If you choose to read the chapter, you will not be able to visit your friend and vice versa.

LINK

Chapter 4.3 Movements

along a PPC

TIP
In explaining
opportunity cost, it is
always useful to give
an example.

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Reading has an opportunity cost

3.2 Influence of opportunity cost on

decision making
Opportunity cost and consumers
Consumers are buyers and users of goods and services. We are all consumers. The vast
majority of us cannot buy everything we like. You may, for example, have to choose which
economics dictionary to buy. You will probably consider a number of different ones, taking
into account their prices. The choice will then tend to settle on two of them. You are likely to
select the one with the widest and the most accurate informative coverage. The closer the
two dictionaries are in quality and price, the harder the choice will be.
Opportunity cost and workers
Undertaking one job involves an opportunity cost. People employed as teachers might also
be able to work as civil servants. They need to carefully consider their preference for the jobs
available. This would be influenced by a number of factors, including the wage paid, chances
of promotion and the job satisfaction to be gained from each job. If the pay of civil servants or
their working conditions improve, the opportunity cost of being a teacher will increase. It may
even increase to the point where some teachers resign and become civil servants instead.
 Cambridge IGCSE Economics

GROUP ACTIVITY 1

In your group, discuss why the opportunity cost of working as an accountant is likely to be
higher than that of working as a window cleaner.

Opportunity cost and producers

Producers have to decide what to make. If a farmer uses a field to grow sugar beet, he cannot
keep cattle on that field. If a car producer uses some of his factory space and workers to
produce one model of a car, he cannot use the same space and workers to make another
model of the car at the same time.
In deciding what to produce, private sector firms will tend to choose the option which will
give them the maximum profit. They will also take into account the demand for different
products and the cost of producing those products.

Opportunity cost and the government

LINK
Government has to carefully consider its expenditure of tax revenue on various things.
If it decides to spend more on education, the opportunity cost involved may be a
Chapter 4.3 Movements reduced expenditure on healthcare. It could, of course, raise tax revenue in order to spend
along a PPC
more on education. In this case, the opportunity cost would be put on the taxpayers.
To pay higher taxes, people may have to give up the opportunity to buy certain products
or to save.
18

TIP
Opportunity cost is one of the most important concepts in economics. You will find that you can
use it in answers to a relatively wide range of structured questions.

INDIVIDUAL ACTIVITY 1

In each of the following cases, consider what might be the opportunity cost.
a A person wanting to buy fruit, decides to buy apples.
b A person decides to study economics at a university.
c A factory is built on farm land.
d A woman has a television set which cost her $800 two years ago. A new set would cost her
$1000 and she could sell her television set for $450. What is the opportunity cost of keeping
the old television?

LINK
Economic goods and free goods
As resources are used to produce economic goods, their production involves an opportunity
Chapter 1.2 Economic
goods and free goods cost. In contrast, no resources are used to produce free goods and so they do not involve an
opportunity cost.
 Chapter 3: Opportunity cost

Summary
You should know:
■ Opportunity cost is an important concept as it emphasises that people have to consider what they are
sacrificing when they decide what to buy, what job to do and what to produce, and when governments
are deciding what to spend their tax revenue on.
■ Economic goods have an opportunity cost whereas free goods do not.

Multiple choice questions

1 What is meant by ‘opportunity cost’?
A The best alternative forgone
B The cost of the item selected
C The cost of exploring business opportunities
D The labour used in producing the product

2 A person decides to go to the university for three years, to study economics. If he had not
gone, he could have taken up a job which would have paid him $15 000 a year. After he
graduates he expects to find a job paying him $40 000 a year. What is the opportunity cost
of going to the university for him?
A $15 000 B $40 000
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C $45 000 D $120 000

3 What are the characteristics of a free good?

A Has an opportunity cost Takes resources to produce it

B Has an opportunity cost Takes no resources to produce it
C Has no opportunity cost Takes no resources to produce it
D Has no opportunity cost Takes resources to produce it

4 On his birthday, Kamran receives $200 from his aunt, $50 of which he decides to save. He
is taken out by his father for lunch. His father pays the bill. Kamran spends the afternoon
playing football. Which of these activities involves an opportunity cost?

Eating the free lunch Playing football Saving

A No No No
B No No Yes
C No Yes Yes
D Yes Yes Yes

Four-part question
a Define opportunity cost. (2)
b Explain why opportunity cost is an important concept for producers. (4)
c Analyse what effect the building of an airport may have on the decision of how to use an
area of land nearby. (6)