Opportunity Cost (Edexcel IGCSE Economics)
Exam board Pearson Edexcel · IGCSEUpdated 2024-04-08
Opportunity Cost Defined
Spec point —
1.1.1b
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Opportunity cost is the loss of the next best alternative when making a decision
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Due to the problem of scarcity, choices have to be made about how to best allocate limited resources amongst competing wants and needs
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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)
Opportunity Cost in Decision Making
Spec point —
1.1.1b
- 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 so a different allocation of resources
Examples of how the Consideration of Opportunity Costs can Change Decisions
| Stakeholder | Example |
|---|---|
| Consumer | - Ashika is wanting to visit her best friend in Iceland - She looks at flight prices from London to Reykjavík - On Friday night it costs £120, whereas Thursday night is only £50 - She is about to book the Thursday flight but then realises that the opportunity cost of saving £60 on a flight is the inability to work on Friday (loss of £130 income) - Ashika books the more expensive flight. If she had booked the cheaper flight, it would have cost her the income from the missed day of work (£130) + £50 for the ticket |
| Producer | - A firm selling organic avocados is offered a supply contract by a large supermarket that wants to buy all of their stock each month, but at a low price - The supermarket is a prestigious customer - The firm decides not to accept the contract as the opportunity cost (loss of prestigious customer) is worth less than the lost revenue to existing customers |
| Government | - The Australian Government has entered into a contract with France to supply them with 8 submarines valued at $70 billion - The USA hears about it and pressurises Australia to buy the submarines from them instead - The Australian Government considers the opportunity cost of denying the USA, which includes less preferential deals on other military hardware and general trade agreements - They decide to break the contract with France and view this as the approach that carries the lowest opportunity cost |
Exam Hint Opportunity cost is about the loss of the next best alternative. It is not a monetary amount. Money may well be a factor, but opportunity cost is about the loss of the next best choice when making a decision.
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