Chapter 3: Opportunity Cost

STUDY WITH SWATI

Maximizing Learning Potential
What is Opportunity Cost?
• Opportunity cost is the cost of the next best alternative that is forgone in
order to take a decision.

• For example: A farmer chooses to plant wheat; the opportunity cost is

planting a different crop, or an alternate use of the resources (land and
farm equipment). 
EXAMPLE
Why does Opportunity Cost arise?
• Opportunity cost arises as individuals, producers and governments
have to make competing choices due to finite or limited resources
which have alternative uses.

• There is a need to make a choice when allocating scarce resources

which ultimately leads to opportunity cost.

• Opportunity cost is a result of the economic problem of scarcity.

(revise from Chapter 1: The nature of the economic problem)
Who can face an Opportunity Cost?

• All economic agents like consumers, workers, firms and

the government face an opportunity cost as they need
to make choices.
Opportunity cost and Consumers

• When consumers purchase a product, they are giving up the opportunity to

purchase another product due to limited incomes. The next best alternative
not chosen becomes the opportunity cost of the product chosen.

• For example: If the boy in the photo chooses to eat the cupcake, the apple
becomes his opportunity cost.
Opportunity cost and Consumers

• The opportunity cost to a

worker of working in a factory
would be the leisure time he
would have sacrificed to work
instead of skipping work.
• As workers have limited time, they have to decide which job to
choose. If they undertake one job, they cannot do another job as
they take into account the wage and non-wage factors
Opportunity cost and Firms
• As firms have limited resources
they have to decide what to
produce.

• For example: If a firm produces

more of one model of car, it
may have to produce less of
another model while taking
into account profits that can be
earned.
 Opportunity cost and the Government

VS

• Governments have to decide how to spend tax revenue.

• Example: if they spend more tax revenue on education, they

cannot spend it on health care and thus the opportunity cost of
education is healthcare.
How do we calculate Opportunity Cost?
Opportunity Cost in Economic Goods & Free
Goods
• Economic good: A good that requires resources to produce it and
thus has an opportunity cost. Eg. Education, cars, clothes.

• Free good: A good that does not require resources to make it and so
does not have an opportunity cost. Eg. sunshine, water in a river.