choices and opportunity cost

People's choices about what goods and services to buy and consume determine how resources will be used. The choices people make have both present and future consequences - consider for example the decision of students to stay on in full-time education after GCSE exams and A-Levels. You are forsaking some lost earnings in the short run (rarely can students study and hold down a full-time job!) but have the prospect of increased earnings potential in the future if you succeed on your course and achieve good grades.

There is a famous saying in economics that "there is no such thing as a free lunch". Even if we are not asked to pay for consuming a good or a service, scarce resources are used up in the production of it and there must be some opportunity cost involved - the next best alternative that might have been produced using those resources.

Opportunity cost measures the cost of any economic choice in terms of the next best alternative foregone

Many examples of opportunity cost exist at the level of the individual, the household, the firm, the government and the economy:

The opportunity cost of deciding not to work is the lost wages foregone 

The opportunity cost of spending money on a foreign holiday is the lost opportunity to buy a new dishwasher or the chance to enjoy two short breaks inside the United Kingdom

The opportunity cost of the government spending £20 billion on interest payments on the national debt is the extra money it might have allocated to the National Health Service

The opportunity cost of an economy investing its resources in new capital goods is the current production of consumer goods that is given up 

The opportunity cost of using arable farm land to produce wheat is that the land cannot be used in that production period to harvest potatoes

Revision Point:

When we are considering the opportunity costs of decisions we make, we must use the highest-valued alternative that has had to be sacrificed for the option we have chosen. Many choices involve more than one alternative (list your five favourite night clubs!)