Opportunity cost | IGCSE Class 10 Economics Notes

This note covers opportunity cost, meaning the next best alternative forgone; scarcity, meaning limited resources relative to wants; personal, production and public choices; and the calculation of output sacrificed when production changes.

What is opportunity cost?

Definition: Opportunity cost is the next best alternative forgone when a choice is made. An alternative is another available course of action; forgone means given up.

A choice provides something, but it can also prevent something else from being obtained. Opportunity cost directs attention to that sacrificed possibility. The relevant alternative is the best available option that the decision maker gives up, rather than the option actually selected.

What does next best mean?

Next best means the alternative the decision maker would prefer if the chosen option were unavailable. Where several alternatives compete for the same resources, opportunity cost refers to this alternative, rather than the sum of every rejected possibility.

This distinction matters because those rejected possibilities may themselves compete for the same resources. Adding them together could describe a combination the decision maker could not have obtained. Identify a feasible alternative, meaning one that could actually have been chosen.

Opportunity cost can be described as a good, a service or a benefit sacrificed. Goods are physical objects that satisfy wants; services satisfy wants through activities rather than physical objects. Corn is a good, while teaching provides a service.

Whose sacrifice matters?

The idea applies to an individual and to society. A decision maker is a person or organisation making a choice. The alternative forgone must belong to that decision maker's available choices, rather than to an unrelated person or organisation.

For society as a whole, producing more corn can require giving up cotton. The cost is then expressed in cotton sacrificed. The corn gained explains the benefit of the change; it does not identify its opportunity cost.

At an individual level, the same reasoning asks what the person gives up by committing resources to a chosen use. The setting changes, but the question remains the same: what is the next best use of these resources that is being sacrificed?

Why does scarcity make opportunity cost important?

Resources are the goods and services used to produce other goods and services, including land, labour, tools and machinery. Labour means human work used in production. Production is the activity of making goods or providing services.

People want many goods and services, while the resources available to satisfy those wants are limited. This relationship is scarcity. It creates the need to choose how resources are used because competing wants cannot all be satisfied with the available resources.

How does the need to choose arise?

A family farm has a limited ability to produce corn with its resources. It can use part of the corn itself and exchange the rest for other goods and services. Its ability to obtain those other goods and services is therefore limited too.

The family cannot treat each desire as though it has a separate, unlimited supply of resources. Obtaining more of one good can require giving up another. The same problem appears across society when resources could be used for different kinds of production.

Resource allocation means deciding how much of each resource to devote to producing different goods and services. An allocation produces a particular combination of goods and services. Changing that allocation changes what can be produced with the available resources.

1. Identify the limited resources available to the decision maker.
2. Identify the competing uses to which those resources could be put.
3. Recognise that selecting a use can prevent an alternative use.
4. Identify the next best alternative sacrificed by the selection.

Is scarcity confined to individuals?

An economy is the system through which a society organises production, exchange and consumption. Exchange means obtaining something by giving something else; consumption means using goods and services to satisfy wants. Society also faces limits on its resources.

Scarcity therefore matters both for personal choices and for decisions about the economy's production. Opportunity cost connects the limitation to the particular sacrifice. Saying that resources are scarce explains why a choice is needed; naming the alternative forgone explains the cost of that choice.

How can the next best alternative be identified?

Begin with the choice actually being made. State what is selected, what resources it uses and which alternatives are available. Then ask which alternative would be chosen if the selected option were unavailable. That is the starting point for identifying the sacrifice.

What must an answer distinguish?

If a question gives several possibilities but no preference ranking, a ranking being an order of preference, the next best option may not be identifiable. State the information needed rather than assuming that the most expensive option must be preferred.

Is opportunity cost the same as money spent?

Money expenditure means the amount of money paid. Opportunity cost concerns the alternative given up. Money can help describe a sacrifice, but a payment does not by itself explain which alternative use of the resources has been lost.

The corn-and-cotton production example makes this clear. A change in production can be assessed in units of cotton forgone without assigning either crop a price. No money value is needed to identify the physical output sacrificed in that comparison.

Conversely, an answer should not invent a money value when no prices are supplied. If the information concerns goods sacrificed, answer in those goods. If it concerns an alternative activity, name that activity and explain why choosing the selected use prevents it.

Note: Keep the chosen benefit separate from the sacrificed alternative. Opportunity cost answers the question “What is given up?”, rather than “What is received?”

How does opportunity cost affect consumers?

A consumer uses goods and services to satisfy wants. A household is an individual or group for whom consumption decisions are made. Consumers must consider what their limited resources can obtain and which wants they prefer to satisfy.

How can a household choice involve a sacrifice?

A family wanting a bigger house may have to give up the idea of having a few more acres of arable land. Arable land is land suitable for growing crops. The bigger house is the selected benefit; the additional land is the possible sacrifice.

The wording matters. The family may face this sacrifice; the example does not establish that every bigger house requires additional land to be forgone. The relevant question is whether those alternatives compete for that family's available resources.

Similarly, a family wanting more and better education for its children may have to give up some luxuries of life. Luxuries here mean goods or services beyond basic necessities. The comparison concerns education obtained and luxuries that might be sacrificed.

To describe either sacrifice as the opportunity cost precisely, establish that it is the family's next best alternative. The fact that a good is rejected does not, by itself, establish its place in the family's order of preferences.

How does this influence a spending decision?

The consumer compares what the selected option provides with what would be available from the next best use of the resources. This comparison makes the consequence of choosing visible. It does not prescribe the same choice for every household.

The household examples also show why an answer should be specific. Saying “the family gives up something else” leaves the sacrifice unclear. Naming the additional arable land or the luxuries links the explanation to the actual alternatives described.

A useful explanation therefore identifies the household's constraint, meaning the limit it faces, the benefit it wants and the next best alternative it would forgo. The opportunity cost is relevant to the choice even when the question supplies no numerical prices.

How does opportunity cost affect workers?

A worker supplies labour, and an occupation is a type of work. Workers make choices about the use of their labour. When a chosen use prevents another available use, the best alternative forgone is relevant to the decision.

What should a worker compare?

Wages are payments for labour. Occupational choices can be influenced by wage factors and by non-wage factors, which are considerations other than pay. The latter distinction means that a comparison of occupations need not be a comparison of wages alone.

Opportunity-cost reasoning asks which available alternative the worker gives up by making the choice. If the information does not identify alternative opportunities, it is not possible to attach a specific forgone wage or occupation to the decision.

Do not treat every occupation that exists as an available alternative for the worker. The relevant alternative must be feasible in the circumstances described. Equally, do not assume that a worker necessarily ranks occupations entirely by the wages offered.

How should the reasoning be organised?

1. Identify the worker's selected use of labour from the information given.
2. Establish which other uses are actually available to that worker.
3. Use any stated preferences, including wage and non-wage considerations, to identify the next best alternative.
4. Explain what is forgone and how awareness of that sacrifice can influence the decision.

The worker's choice illustrates the same principle as a consumer's choice, but the resource being allocated differs. A consumer considers alternative uses of purchasing resources; the worker considers available uses of labour. In both cases, the next best alternative provides the comparison.

A complete qualitative explanation, meaning an explanation without numerical measurement, can therefore identify the selected use and the alternative sacrificed. A numerical answer would require the relevant figures. Neither a wage amount nor a preference order should be supplied by assumption.

How does opportunity cost affect producers?

A producer makes goods or provides services, and a firm is a business carrying out production. Producers allocate resources among possible uses. Output means the goods and services produced. Opportunity cost helps identify the output sacrificed when resources are committed elsewhere.

What changes when resources move between uses?

In the corn-and-cotton example, using more scarce resources to produce corn leaves fewer resources available for cotton. Where the available resources are fully utilised, obtaining more corn requires accepting less cotton along the production boundary, meaning the maximum combinations attainable with given resources and technology. Technology is the knowledge and methods available for production.

Full utilisation means using all the available resources. The production boundary compares the output combinations available under those conditions. If the resource or technological conditions change, the comparison must take account of that change. The boundary is explained in more detail below.

The producer needs to identify both sides of the change: the extra output obtained and the output forgone. Looking at the increase alone omits a relevant consequence of reallocating the resources. Reallocation means moving resources from one use to another.

Does a physical sacrifice identify the best decision?

Knowing the cotton sacrificed identifies a cost of increasing corn production. It does not by itself prove that increasing corn is desirable. A decision also requires consideration of the benefit from the extra corn compared with the alternative cotton output.

Physical quantities alone do not supply prices or the importance attached to each crop. A production table therefore identifies feasible combinations and the sacrifices between them. It should not be used to invent a money return or declare a combination that everyone must prefer.

The same resource-allocation question applies more widely to choices about what to produce and how to produce it. Society can consider more agricultural goods or more industrial products and services, and production can involve different combinations of labour and machines.

For opportunity cost, keep the explanation focused on the selected use and the next best alternative. Wider production choices provide the context, but the cost of a particular decision must be tied to the resources and alternatives in that particular comparison.

How does opportunity cost affect governments?

A government makes public decisions, including decisions about allocating resources. Public decisions affect society rather than simply one household. Resources used for a selected public purpose can be unavailable for another purpose, so the next best alternative is relevant.

Which public choices involve competing uses?

Society must decide how much to devote to education and health and how much to devote to military services. Education itself involves choices between basic education and higher education. These are different uses of resources, rather than independent claims on an unlimited supply.

Basic education refers here to education at the foundational level, while higher education refers to study beyond school. The opportunity-cost question concerns the provision forgone when resources are committed to the selected use. It does not establish a preferred allocation in advance.

When analysing a government decision, identify the next best alternative public use. Do not automatically combine every competing service into a single opportunity cost. The relevant comparison depends on the alternative that the government would otherwise have selected.

How can present and future uses compete?

Consumption goods satisfy wants directly. Investment goods, such as machines, are used to support production. Society faces a choice between more consumption goods and more investment goods that will boost production and consumption tomorrow.

This is a choice about the timing and purpose of resource use. Resources committed to producing investment goods cannot simultaneously produce the alternative consumption goods forgone. Opportunity cost makes the present sacrifice visible when considering the benefits of investment.

The concept identifies a comparison; it does not rank public objectives by itself. Education, health and other public uses need to be assessed in relation to the benefits and sacrifices involved. Naming a sacrifice is different from proving that the selected use is undesirable.

A clear explanation follows the allocation through to its consequence. It states which resources are committed, what public provision is selected and which next best provision is forgone. Without information on available alternatives, a precise amount of public output sacrificed cannot be calculated.

How does a production possibility curve show opportunity cost?

A production possibility curve (PPC), also called a production possibility frontier (PPF), shows the maximum combinations of two goods an economy can produce with given resources and technology. A combination specifies how much of each good is produced.

What do the production possibilities show?

The table gives combinations of corn and cotton when resources are fully utilised. A, B, C, D and E are labels for the production possibilities, not quantities or algebraic variables. Each quantity is measured in units of its respective crop.

At possibility A, resources produce cotton alone. At E, they produce corn alone. B, C and D contain both crops. Moving towards more corn along the boundary reduces cotton output, so the lost cotton identifies the opportunity cost of the additional corn.

Corn is on the horizontal axis and cotton on the vertical axis. The origin, where the axes meet, is labelled O. A downward-sloping curve joins A, B, C, D and E, becoming steeper towards E. A is on the cotton axis and E is on the corn axis.

Reference: NCERT Class 12, page 4, unnumbered figure

Why does the position of a point matter?

The production possibility set contains all combinations attainable with given resources and technology. Points on or below the frontier are attainable. A point strictly below it represents resources that are underemployed, meaning not fully used, or used wastefully.

A movement along the frontier compares maximum production combinations under the stated conditions. It is this comparison that shows how much of one crop must be forgone to obtain more of the other. Keep those conditions attached to the explanation.

Do not turn the frontier example into a claim that every increase in production must reduce another output. Where resources are underemployed or used wastefully, better use of them can permit an increase without the same sacrifice. The starting position matters.

The table shows possible output combinations rather than a preference ranking. It therefore supports calculations of sacrifices between combinations, but it does not establish which combination society ought to choose.

How is opportunity cost calculated from the production table?

Compare the starting and finishing combinations. The good that decreases is the output forgone; the good that increases is the output gained. State both changes before interpreting the opportunity cost, and keep the units attached to each result.

For a move towards more corn, subtract the final cotton quantity from the initial cotton quantity. To express the sacrifice for each extra unit of corn, divide cotton forgone by the increase in corn. The symbol ÷ means division; − means subtraction.

Opportunity cost per unit = output forgone ÷ extra output gained. Here, output forgone is the reduction in the alternative good, and extra output gained is the increase in the selected good. “Per unit” means for each additional unit obtained.

How are the two changes in output found?

Each change is a subtraction between the two combinations being compared. The alternative good is the one whose quantity falls, and the selected good is the one whose quantity rises. Write the starting combination first and the finishing combination second.

$\text{Output forgone} = \text{starting amount of the alternative good} - \text{finishing amount of the alternative good}$

$\text{Extra output gained} = \text{finishing amount of the selected good} - \text{starting amount of the selected good}$

Subtracting in this order gives positive results for a move along the frontier. In a move from B to C with corn as the selected good, output forgone is 9 − 7, or 2 units of cotton, and extra output gained is 2 − 1, or 1 unit of corn.

What does each successive increase in corn cost?

Worked example 1. At A, the economy produces 0 units of corn and 10 units of cotton. At B, it produces 1 unit of corn and 9 units of cotton. Find the opportunity cost of moving from A to B.

Answer: Corn increases by 1 − 0, or 1 unit. Cotton falls by 10 − 9, or 1 unit. The opportunity cost of the additional unit of corn is therefore 1 unit of cotton.

Worked example 2. At B, the economy produces 1 unit of corn and 9 units of cotton. At C, it produces 2 units of corn and 7 units of cotton. Find the opportunity cost of moving from B to C.

Answer: Corn increases by 2 − 1, or 1 unit. Cotton falls by 9 − 7, or 2 units. The opportunity cost of this additional unit of corn is therefore 2 units of cotton.

Worked example 3. At C, the economy produces 2 units of corn and 7 units of cotton. At D, it produces 3 units of corn and 4 units of cotton. Find the opportunity cost of moving from C to D.

Answer: Corn increases by 3 − 2, or 1 unit. Cotton falls by 7 − 4, or 3 units. The opportunity cost of this additional unit of corn is therefore 3 units of cotton.

Worked example 4. At D, the economy produces 3 units of corn and 4 units of cotton. At E, it produces 4 units of corn and 0 units of cotton. Find the opportunity cost of moving from D to E.

Answer: Corn increases by 4 − 3, or 1 unit. Cotton falls by 4 − 0, or 4 units. The opportunity cost of this additional unit of corn is therefore 4 units of cotton.

What conclusion follows from these calculations?

Across these successive movements, the extra corn obtained stays at 1 unit while cotton sacrificed increases from 1 to 2 to 3 to 4 units. Thus, in this production schedule, the opportunity cost of each additional unit of corn increases.

The horizontal axis lists the four moves along the frontier in order: A to B, B to C, C to D and D to E. The vertical axis measures units of cotton forgone for one extra unit of corn. Four bars rise from 1 unit to 2, 3 and then 4 units of cotton. The rising bars show increasing opportunity cost: each additional unit of corn costs more cotton than the one before.

Reference: derived from NCERT Class 12, page 3, Table 1.1

This conclusion concerns the given schedule. It does not supply a money value for either crop, and it does not establish that every possible production relationship has an identical pattern. The calculated differences describe these particular production possibilities.

Can the table be read in the other direction?

Yes. Along the frontier, having more of either good means having less of the other, so the opportunity cost can be stated in either good. The calculation keeps the same form; only the names of the goods change.

$\text{Opportunity cost of one more unit of corn} = \frac{\text{cotton forgone}}{\text{extra corn gained}}$

$\text{Opportunity cost of one more unit of cotton} = \frac{\text{corn forgone}}{\text{extra cotton gained}}$

Worked example 5. At E, the economy produces 4 units of corn and 0 units of cotton. At D, it produces 3 units of corn and 4 units of cotton. Find the opportunity cost of the extra cotton obtained by moving from E to D.

Answer: Cotton increases by 4 − 0, or 4 units. Corn falls by 4 − 3, or 1 unit. The opportunity cost of the 4 additional units of cotton is therefore 1 unit of corn. Dividing 1 by 4 gives 0.25 unit of corn for each additional unit of cotton.

The two directions use the same table values but answer different questions. Moving from D to E costs 4 units of cotton for 1 unit of corn; moving from E to D costs 1 unit of corn for 4 units of cotton. Always state which good is being obtained.

What does a larger move along the frontier cost?

Worked example 6. At A, the economy produces 0 units of corn and 10 units of cotton. At E, it produces 4 units of corn and 0 units of cotton. Find the opportunity cost of moving from A to E.

Answer: Corn increases by 4 − 0, or 4 units. Cotton falls by 10 − 0, or 10 units. The opportunity cost of the 4 additional units of corn is therefore 10 units of cotton. Dividing 10 by 4 gives an average of 2.5 units of cotton for each additional unit of corn.

This total matches the four successive moves, because 1 + 2 + 3 + 4 gives 10 units of cotton. The average of 2.5 units hides the fact that the successive costs rise from 1 unit to 4 units, so the individual moves are more informative than the average.

How should opportunity cost influence a decision?

Opportunity cost helps a decision maker compare a chosen use of resources with the best alternative forgone. It broadens the comparison beyond what is obtained. The relevant question is whether the benefit sought is worth the sacrifice involved in obtaining it.

What is a complete chain of reasoning?

1. Identify the decision maker. Establish whether the choice belongs to a consumer, worker, producer or government.
2. Identify the constraint. State which limited resources prevent all the competing uses from being pursued together.
3. Identify the alternative. Establish the best feasible option that would be chosen instead.
4. Describe the sacrifice. Name what is forgone, using supplied quantities where a calculation is possible.
5. Connect cost to choice. Explain that the sacrifice must be considered alongside the benefit of the selected use.

This reasoning can support a numerical answer or an explanation in words. The corn-and-cotton schedule permits quantities to be calculated. The household examples describe possible sacrifices without supplying prices. Each should be answered using the kind of information it actually provides.

What can the concept establish, and what remains uncertain?

An identified opportunity cost does not prove that the choice is mistaken. A sacrifice can accompany a desirable decision. Conversely, describing a benefit does not remove the sacrifice. The comparison requires both sides of the choice to remain visible.

The amount sacrificed also does not reveal all preferences. A table of production possibilities cannot by itself show whether society prefers more corn or more cotton. A description of competing household wants does not automatically establish which rejected want ranks highest.

Use conditional language where the circumstances are conditional. A family may have to sacrifice land for a bigger house or luxuries for education. Preserve that possibility rather than converting it into a rule about every family's choices.

A careful conclusion states the opportunity cost that the evidence supports and identifies any missing information. It does not invent prices, available occupations, resource quantities or preferences to make a decision appear more certain than the information allows.

Glossary

• Opportunity cost — The next best alternative forgone when a decision maker chooses a particular use of resources.
• Scarcity — The condition in which available resources are limited relative to the wants they could satisfy.
• Resources — Goods and services used to produce other goods and services, including land, labour, tools and machinery.
• Resource allocation — The decision about how much of each resource to devote to producing different goods and services.
• Consumer — A person who uses goods and services to satisfy wants and needs.
• Household — An individual or group for whom decisions about consumption are made.
• Producer — A person or organisation that makes goods or provides services using available resources.
• Labour — Human work used in the production of goods and services.
• Wages — Payments received by workers in return for supplying their labour.
• Non-wage factors — Considerations other than pay that can influence an individual's choice of occupation.
• Output — The goods and services produced through the use of resources.
• Production possibility curve — A curve showing the maximum combinations of two goods producible with given resources and technology.
• Production possibility set — All combinations of goods and services that can be produced with given resources and technological knowledge.
• Investment goods — Goods, such as machines, used to support production rather than directly satisfy consumption wants.

Common errors and misconceptions

• Misconception: Opportunity cost is the option selected. Correct: It is the next best alternative forgone; the selected option identifies what is obtained.
• Misconception: Add every rejected option to find opportunity cost. Correct: Identify the next best feasible alternative, rather than adding mutually competing alternatives.
• Misconception: Opportunity cost must be a money payment. Correct: It can be expressed as goods, services or benefits forgone, including cotton sacrificed for additional corn.
• Misconception: Every family choosing a bigger house gives up additional arable land. Correct: The family may have to make that sacrifice; it depends on its resources and alternatives.
• Misconception: Moving from B, with 1 corn and 9 cotton, to C, with 2 corn and 7 cotton, costs 7 cotton. Correct: The sacrifice is the reduction of 2 units of cotton, not the cotton remaining.
• Misconception: Every increase in production necessarily sacrifices another output. Correct: The frontier comparison assumes given resources and technology; underemployed or wastefully used resources require different reasoning.
• Misconception: A production table establishes which combination society should choose. Correct: It shows possibilities and sacrifices, but does not itself provide society's preferences.
• Misconception: A choice with an opportunity cost must be undesirable. Correct: The sacrifice must be considered alongside the benefit of the chosen use.

Exam-style questions with model answers

Q1. Define opportunity cost and distinguish it from the option selected. [2 marks]

1. Opportunity cost is the next best alternative forgone when a choice is made.
2. The option selected is what the decision maker obtains; opportunity cost identifies what the decision maker sacrifices.

Q2. A family wants a bigger house and may have to give up additional arable land. Explain the possible opportunity cost and the condition needed to identify that land as the next best alternative. [3 marks]

1. The bigger house is the benefit the family wants to obtain through its chosen use of limited resources.
2. The additional arable land may be sacrificed if the family's resources cannot provide both the bigger house and that land.
3. The land is the opportunity cost if obtaining it is the family's most preferred feasible alternative to the bigger house.

Q3. With given resources and technology fully utilised, production changes from 1 unit of corn and 9 units of cotton to 2 units of corn and 7 units of cotton. Calculate and explain the opportunity cost of the extra corn. [4 marks]

1. The increase in corn is 2 − 1, which gives 1 additional unit of corn from the production change.
2. The reduction in cotton is 9 − 7, which gives 2 units of cotton forgone in the same change.
3. The opportunity cost is therefore 2 units of cotton for the additional unit of corn obtained.
4. Cotton sacrificed measures the alternative output lost; the 7 units of cotton remaining do not measure the sacrifice.

Q4. An economy fully utilises given resources and technology. Its production possibilities, measured in units, are A: corn 0, cotton 10; B: corn 1, cotton 9; C: corn 2, cotton 7; D: corn 3, cotton 4; E: corn 4, cotton 0. Calculate the cotton cost of each successive extra unit of corn, describe the pattern and explain what the table cannot establish about the preferred combination. [6 marks]

1. From A to B, corn increases by 1 unit while cotton falls from 10 to 9, so the opportunity cost is 1 unit of cotton.
2. From B to C, corn increases by 1 unit while cotton falls from 9 to 7, so the opportunity cost is 2 units of cotton.
3. From C to D, corn increases by 1 unit while cotton falls from 7 to 4, so the opportunity cost is 3 units of cotton.
4. From D to E, corn increases by 1 unit while cotton falls from 4 to 0, so the opportunity cost is 4 units of cotton.
5. The cotton sacrifice increases for successive equal increases in corn, showing increasing opportunity cost across the given schedule.
6. The table gives production possibilities and sacrifices, but no preference ranking for society. It cannot establish which combination society should prefer.

Q5. Explain how opportunity cost is relevant to a worker choosing an occupation, including the roles of wage and non-wage factors. No particular occupations, pay amounts or preferences are specified. [4 marks]

1. The worker considers available uses of labour and identifies the occupation selected, rather than assuming every occupation is feasible.
2. The next best feasible occupation forgone provides the opportunity cost, so a specific alternative cannot be named without further information.
3. Wage factors concern pay, while non-wage factors concern other considerations; both can influence the worker's preference between available occupations.
4. The worker compares the chosen occupation with the alternative sacrificed, but no numerical wage loss can be calculated from the information supplied.

Q6. Explain how opportunity cost helps a government consider allocating scarce resources between education and health provision and military services. No output quantities, money amounts or preference ranking are supplied. [5 marks]

1. Scarce resources have competing public uses, so resources allocated to a chosen service cannot also provide every alternative use of those resources.
2. The government must identify its selected allocation, such as the resources devoted to education and health provision or to military services.
3. It must then identify the next best feasible allocation forgone, rather than automatically adding together all possible rejected public services.
4. The forgone provision is relevant when comparing the benefits of the selected allocation with the benefits lost from the alternative public use.
5. No precise numerical sacrifice or preferred allocation can be established here because the necessary quantities and ranking of alternatives have not been supplied.

Q7. Define a production possibility curve and explain why a movement along it can illustrate opportunity cost when resources and technology are given. [3 marks]

1. A production possibility curve shows the maximum combinations of two goods that an economy can produce with given resources and technology.
2. A movement towards more of one good along the frontier requires reducing the amount of the other good produced with those resources.
3. The alternative output forgone measures the opportunity cost of the extra output obtained, so the direction of the movement determines which good is sacrificed.

Key takeaways

• Opportunity cost is the next best alternative forgone when a choice commits limited resources to a particular use.
• Scarcity creates the need to choose, while opportunity cost identifies the specific alternative sacrificed through that choice.
• Consumers, workers, producers and governments all need to consider the alternatives available when allocating their resources.
• A family may have to sacrifice additional land for a bigger house or some luxuries for better education.
• Opportunity cost can be expressed in goods or services forgone without converting the sacrifice into money.
• Along a production possibility frontier with given resources and technology, obtaining more of one good requires less of another.
• The corn-and-cotton schedule shows increasing cotton sacrifices for successive equal increases in corn, without identifying society's preferred combination.
• A sound decision considers the benefit obtained alongside the next best alternative sacrificed and recognises missing information.

Test yourself

What does “forgone” mean in the definition of opportunity cost?

It means given up: the next best alternative is sacrificed when the selected choice is made.

Why should all rejected alternatives not be added together?

Opportunity cost refers to the next best feasible alternative. Other rejected alternatives may compete for the same resources and could not all have been obtained together.

A family may sacrifice luxuries for better education. Why is “may” important?

It preserves the conditional nature of the example. The sacrifice depends on the family's resources and choices; it is not a rule for every family.

Must opportunity cost be stated in money?

No. It can be stated as goods, services or benefits forgone, such as cotton sacrificed to obtain more corn.

Production moves from 2 corn and 7 cotton to 3 corn and 4 cotton, measured in units. What is the cost of the additional corn?

Corn rises by 1 unit while cotton falls by 3 units. The opportunity cost of the additional unit of corn is 3 units of cotton.

What does a point strictly below a production possibility frontier represent?

It represents an attainable combination where all or some resources are underemployed or used in a wasteful fashion.

Why might pay alone be insufficient to explain a worker's occupational choice?

Wage and non-wage factors can influence the choice. The worker's preferred available alternative therefore need not be identified by comparing wages alone.

Does identifying an opportunity cost prove that a choice is undesirable?

No. The sacrifice must be considered alongside the benefit obtained. Opportunity cost identifies a relevant comparison rather than automatically rejecting the chosen use.