Identify and explain examples of opportunity cost in a range of contexts (personal, business, government and international trade).
What is Opportunity Cost?
Opportunity cost is the value of the next best alternative that must be given up when a choice is made. It can be expressed as:
\$\text{Opportunity Cost} = \text{Value of next best alternative forgone}\$
Why It Matters
Understanding opportunity cost helps individuals, firms and governments allocate scarce resources efficiently and make informed decisions.
Examples in Different Contexts
1. Personal Context
Choosing to study for an exam instead of working a part‑time job. The opportunity cost is the wages that could have been earned.
Spending $200 on a new smartphone rather than a weekend holiday. The opportunity cost is the enjoyment and experiences from the holiday.
2. Business Context
A factory decides to produce cars instead of motorcycles. The opportunity cost is the profit that could have been earned from motorcycle production.
Investing capital in new machinery versus expanding marketing. The opportunity cost is the additional sales that might have resulted from a larger marketing budget.
3. Government Context
Allocating budget to build a new highway rather than improving public hospitals. The opportunity cost is the health benefits and lives saved that could have resulted from better hospitals.
Funding a space programme instead of subsidising renewable energy research. The opportunity cost is the potential reduction in carbon emissions.
4. International Trade Context
A country exports wheat and imports electronics. The opportunity cost of producing wheat domestically is the electronics that could have been produced if resources were reallocated.
Choosing protectionist tariffs on imported cars. The opportunity cost is the lower prices and greater variety for consumers.
Comparative Table of Opportunity Cost Examples
Context
Decision Made
Next Best Alternative Forgone (Opportunity Cost)
Personal
Study for exam
Wages from part‑time job
Personal
Buy smartphone ($200)
Weekend holiday
Business
Produce cars
Profit from motorcycle production
Business
Invest in machinery
Additional sales from larger marketing budget
Government
Build highway
Health benefits from improved hospitals
Government
Fund space programme
Carbon reduction from renewable energy research
International Trade
Export wheat
Electronics that could be produced domestically
International Trade
Impose tariffs on cars
Lower consumer prices and variety
Key Points to Remember
Opportunity cost is always measured in terms of the next best alternative.
It applies to all economic agents – individuals, firms, governments and nations.
Recognising opportunity costs leads to better resource allocation and more efficient decision‑making.
Suggested diagram: A production possibilities frontier (PPF) showing the trade‑off between two goods and illustrating the concept of opportunity cost along the curve.