IGCSEEconomicsEdexcelRevision NotesThe Market SystemThe Economic ProblemOpportunity Cost

Opportunity Cost (Edexcel IGCSE Economics)

Revision Note

Lorraine

Author

Lorraine

Expertise

Economics Content Creator

Opportunity Cost Defined

  • Opportunity cost is the loss of the next best alternative when making a decision

  • Due to the problem of scarcity, choices have to be made about how to best allocate limited resources amongst competing wants and needs

  • 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

  • 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 Tip

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.

You've read 0 of your 0 free revision notes

Get unlimited access

to absolutely everything:

  • Downloadable PDFs
  • Unlimited Revision Notes
  • Topic Questions
  • Past Papers
  • Model Answers
  • Videos (Maths and Science)

Join the 100,000+ Students that ❤️ Save My Exams

the (exam) results speak for themselves:

    Next topic

    Did this page help you?

    Lorraine

    Author: Lorraine

    Lorraine brings over 12 years of dedicated teaching experience to the realm of Leaving Cert and IBDP Economics. Having served as the Head of Department in both Dublin and Milan, Lorraine has demonstrated exceptional leadership skills and a commitment to academic excellence. Lorraine has extended her expertise to private tuition, positively impacting students across Ireland. Lorraine stands out for her innovative teaching methods, often incorporating graphic organisers and technology to create dynamic and engaging classroom environments.