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1.3 Opportunity cost

IGCSE Economics Notes  Opportunity cost

igcse-economics-notes-opportunity-cost

Topics:

  • 1.3.1 definition of opportunity cost
  • 1.3.2 the influence of opportunity cost on decision making

Guidance :

  • Definition and examples of opportunity cost in different contexts.
  • Decisions made by consumers, workers, producers and governments when allocating their resources.

Note:

 

  • The video is  a preview of our revision notes
  • Note that notes get revised from time to time as per expert advice. 
  • All the IGCSE Economics Notes   are meant for revision and hence are fully downloadable as well as printable once you become a paid member.

Key Concepts

Examples of Opportunity Cost:

Opportunity Cost in Decision Making

  • Opportunity Cost: Opportunity cost is defined as the best alternative forgone when making a decision. It represents the cost of not choosing the next best option.
    • Buying one branded t-shirt or two regular t-shirts instead of one branded one. The opportunity cost is the branded t-shirt you gave up to buy the extra regular t-shirt.
    • Choosing to continue with post-graduation for a high-paying job later or starting a job immediately after graduation to ease financial burden. The opportunity cost is the potential income lost while studying.
    • Buying a villa in the suburbs or a 2-bedroom apartment in a prime location. The opportunity cost is the better location or the more spacious villa depending on the choice made.
    • Consumers: A consumer choosing between two brands of liquid soap—one local and one high-demand brand—must decide what quantity of product they are willing to forgo by opting for the higher price of the more popular brand.
    • Workers: A worker choosing between a high-paying job as a research fellow or pursuing a dream job of treating patients must weigh the opportunity cost in terms of wages, job satisfaction, and promotions.
    • Producers: A producer (e.g., an artist) deciding to paint one masterpiece instead of another is faced with opportunity cost. The unpainted subject becomes the opportunity cost.
    • Governments: A government deciding to allocate funds to disaster relief instead of a new airport project faces an opportunity cost in the form of the postponed airport project.

Exam Tips

  • Understand the Core Definition: Focus on the core idea of opportunity cost as the next best alternative that is forgone in any decision-making process.
  • Provide Clear Examples: Use specific examples from daily life or economics, like consumer decisions or government spending, to illustrate opportunity cost clearly.
  • Relate Opportunity Cost to Different Sectors: Be able to explain opportunity cost in the context of consumers, workers, producers, and governments, and provide real-world examples to support your answer.
  • Link Opportunity Cost to Scarcity: Make sure to connect opportunity cost with the concept of scarcity—since resources are limited, every choice involves giving up something else.
  • Clarity in Comparison: When comparing options, clearly show the trade-offs involved and what is being sacrificed for each choice made. This will demonstrate a deeper understanding.