Opportunity Cost

In economics, the opportunity cost of a particular choice is the value of the next best alternative forgone. This concept is based on the assumption that resources are scarce, and therefore choices must be made about how to allocate them. When an individual or society makes a choice, they must also consider the value of the next best alternative that they are giving up in order to pursue that choice.

For example, consider a person who has the option to either work at their current job, which pays $50,000 per year, or go back to school to get a degree, which would take two years and cost $20,000 in tuition and other expenses. In this case, the opportunity cost of going back to school is the $50,000 that the person would earn by working at their current job for the next two years. This is the cost of giving up the next best alternative, which is to continue working at their current job.

Opportunity cost is important in economics because it helps to illustrate the trade-offs that individuals and society must make in order to allocate their scarce resources in the most efficient and effective way possible. By considering the opportunity cost of a particular choice, individuals and society can make more informed decisions about how to allocate their resources and maximize their well-being.

The concept of opportunity cost assumes that individuals and societies are able to make rational decisions and accurately rank the value of different goods and services according to their preferences. However, this assumption may not always be accurate, and there are situations in which individuals may make decisions that do not reflect their true preferences or that are not in their best interests.

For example, people may make decisions based on emotions or biases rather than rational calculations of opportunity cost. Additionally, the concept of opportunity cost does not take into account external factors that may affect the value of different choices, such as changes in market conditions or shifts in social values. As a result, the concept of opportunity cost may not always provide an accurate or complete picture of the trade-offs associated with different choices.

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Page 1 of 10

A student has nothing to do on a Friday evening. She withdraws $5 from the $100 she has in a savings account and buys a present to take to a party, to which admission is free. What does this involve? A. An opportunity cost equal to $95 B. An opportunity cost equal to other goods she could have bought for $5 C. No opportunity cost, as entrance to the party is free D. No opportunity cost, as she had no better way of using the time

Page 2 of 10

A builder spends one hour travelling to and from work. He works 40 hours per week for $200. He is given a choice to work 50 hours a week for an extra $75. What would be the opportunity cost to the builder of working the extra hours? A. The ability to increase his purchasing power B. The additional time travelling to and from work C. The increased hourly earnings of $7.50 D. The ten hours of leisure time

Page 3 of 10

A farmer sells land used for crops to a firm that will use the land for wind turbines to produce electric power. What is the opportunity cost of this decision by the farmer? A. The cost of installing wind turbines B. The loss of revenue from crops that grow on the land C. The profit made from selling the land D. The reduced cost of producing renewable energy

Page 4 of 10

A student decides to take up a two year apprenticeship for which she will earn $10000 per year. After that she expects to earn $25000 per year. She could take an unskilled job which pays $16 000 per year instead of the apprenticeship. What is the opportunity cost in the two years of completing the apprenticeship? $10,000 $12,000 $25,000 $32,000

Page 5 of 10

A farmer decides to grow potatoes instead of wheat. What is the opportunity cost of growing the potatoes? A. The output of wheat B. The price of seed potatoes C. The profit from growing potatoes D. The time spent preparing the potato field

Page 6 of 10

A farmer reduces the land used to grow wheat from 80 hectares to 60 hectares and increases the use of the land for growing potatoes from 80 to 100 hectares. What is the opportunity cost of this change? A. The output from 20 hectares used for growing potatoes B. The output from 20 hectares used for growing wheat C. The output from 60 hectares used for growing wheat D. The output from 80 hectares used for growing potatoes

Page 7 of 10

In recent years more golf courses, which use large quantities of water, have opened in China. What may be the opportunity cost of this? A. Cost of water B. Loss of farmland C. Sales of golf equipment D. Wages of golf course staff

Page 8 of 10

A student decides to buy a ticket for a concert instead of buying a new shirt. What is the opportunity cost of buying the ticket? A. The concert B. The price of the ticket to the concert C. The shirt D. The time spent purchasing the ticket

Page 9 of 10

Heavy rain caused floods in an area of a country. What may be an opportunity cost of repairing the damage caused? A. The allocation of government funds to the area instead of on a new airport B. The cost of providing shelter for those made homeless C. The decline in the tourist industry in the area D. The loss of profits from businesses affected by the flood

Page 10 of 10

A person can make 10 items to sell on a craft stall in a day. What is the opportunity cost if the person decides to paint a picture instead? A. 10 craft items B. The cost of the materials for the craft items C. The cost of the paint for the picture D. The value of the picture

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Luke Watson

Luke Watson has a BSc (Hons) in international business and economics. He is currently working as an IBDP economics teacher at Shanghai United International School in China.

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