Examples of opportunity cost in different contexts

1.3 Opportunity Cost

1.3.1 Definition

Opportunity cost is the value of the next‑best alternative that must be given up when a choice is made.

\[ \text{Opportunity Cost}= \text{Value of the next‑best alternative forgone} \]

1.3.2 Why Opportunity Cost Matters – link to the three basic economic questions

• What goods and services should be produced? – Resources are scarce, so deciding to produce one good means giving up the production of another.
• How should the chosen goods be produced? – Choosing a production technique involves weighing the opportunity cost of using labour, capital or land in alternative ways.
• For whom are the goods produced? – Allocating income, taxes or subsidies requires an assessment of the next‑best use of those funds.

1.3.3 Numerical illustration

Suppose a country can use all its resources to produce either:

• 100 units of wheat, or
• 50 units of electronics.

If it decides to produce 1 unit of wheat, it must give up 0.5 units of electronics.

\[ \text{Opportunity cost of 1 unit of wheat}= \frac{50\text{ units of electronics}}{100\text{ units of wheat}}=0.5\text{ units of electronics} \]

1.3.4 Production‑possibility‑frontier (PPF)

Combination	Wheat (units)	Electronics (units)
A (All wheat)	100	0
B (Mixed)	50	25
C (All electronics)	0	50

Interpreting the PPF

• Points on the curve – efficient use of all resources; the opportunity cost of producing more of one good is exactly the amount of the other good that must be given up.
• Points inside the curve – resources are under‑utilised; the economy could produce more of at least one good without sacrificing another.
• Points outside the curve – unattainable with the current resources and technology.

Shifts of the PPF

• An outward shift (away from the origin) occurs when there is an increase in the quantity or quality of resources (e.g., discovery of new mineral deposits) or an improvement in technology (e.g., more efficient production methods). This raises the maximum possible output of both goods and reduces the relative opportunity cost of each.
• An inward shift (towards the origin) results from a loss of resources (e.g., natural disaster) or a deterioration in technology, reducing the economy’s productive capacity and increasing opportunity costs.

1.3.5 Examples in different contexts

Personal (consumer/worker) context

• Choosing to study for an exam instead of working a part‑time job. Opportunity cost: the wages that could have been earned.
  Links to: What (how to allocate limited time) and For whom (the student’s future earnings).
• Spending £150 on a new video game rather than a weekend day‑trip. Opportunity cost: the enjoyment and experiences from the trip.
  Links to: What (choice of consumption) and How (how best to use disposable income).

Business (producer) context

• A local workshop decides to make bicycles instead of scooters. Opportunity cost: the profit that could have been earned from scooter sales.
  Links to: What (which product to produce) and How (allocation of labour and capital).
• Investing £20 000 in a new sewing machine rather than a larger advertising campaign. Opportunity cost: the additional sales that might have resulted from the advertising.
  Links to: How (method of increasing output) and For whom (target market reach).

Government context (including a sustainability example)

• Allocating £5 million to build a new secondary school rather than upgrading the nearest community hospital. Opportunity cost: the health benefits and lives saved that could have resulted from the hospital upgrade.
  Links to: What (public services to provide) and For whom (beneficiaries of health vs. education).
• Choosing between a new coal‑fired power plant and a solar‑farm project. Opportunity cost: the long‑term environmental damage and carbon emissions avoided by the solar farm.
  Links to: How (method of generating energy) and What (type of infrastructure). This also satisfies the syllabus requirement to consider sustainability.
• Funding a national renewable‑energy research programme instead of subsidising electric‑vehicle purchases. Opportunity cost: the immediate reduction in road‑transport emissions that could have been achieved through the subsidies.
  Links to: How** (policy instrument) and **For whom** (environmental benefit to society).

International‑trade context

• Country A specialises in wheat and imports electronics from Country B. The opportunity cost of producing one more unit of wheat is the amount of electronics that must be given up.
  Links to: What (goods to specialise in) and How** (through trade).
• Imposing a tariff on imported cars. Opportunity cost: the lower price and greater variety of cars that consumers would have enjoyed without the tariff.
  Links to: How** (government intervention) and **For whom** (consumers).

1.3.6 Comparative table of opportunity‑cost examples

Context	Decision Made	Next‑best alternative forgone
Personal (student)	Study for exam	Wages from part‑time work
Personal (consumer)	Buy video game (£150)	Weekend day‑trip
Business (producer)	Produce bicycles	Profit from scooter production
Business (investment)	Buy new sewing machine (£20 k)	Additional sales from larger advertising budget
Government (education vs. health)	Build secondary school (£5 m)	Health benefits from upgraded hospital
Government (energy sustainability)	Choose solar farm over coal plant	Short‑term electricity output from coal plant
Government (policy instrument)	Fund renewable‑energy research	Immediate emission cuts from EV subsidies
International trade (specialisation)	Specialise in wheat production	Electronics that could have been produced domestically
International trade (tariff)	Impose tariff on imported cars	Lower prices and greater variety for consumers
Worker (labour market)	Accept overtime shift	Leisure time that could have been spent with family

1.3.7 Limitations of the opportunity‑cost concept

• Many benefits are non‑market (e.g., health, environmental quality, personal satisfaction) and are difficult to express in monetary terms.
• Future conditions are uncertain; the “next‑best” alternative may change as technology, tastes or prices evolve.
• Opportunity cost is a marginal concept, yet many real‑world decisions involve large, irreversible commitments where marginal analysis is less informative.
• Accurate data are often unavailable or unreliable, especially for public‑sector projects where benefits are diffuse and long‑term.

1.3.8 Key points to remember

1. Opportunity cost is always measured in terms of the next‑best alternative that is forgone.
2. It applies to all economic agents – consumers, workers, firms, governments and nations.
3. Understanding opportunity cost helps answer the three basic economic questions (what, how, for whom) and leads to more efficient resource allocation.
4. The PPF illustrates opportunity cost visually; the slope of the curve shows the rate at which one good must be sacrificed for another, and shifts of the curve reflect changes in resources or technology.
5. While a useful analytical tool, opportunity cost can be hard to quantify for non‑market benefits and under conditions of uncertainty.