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By the end of this topic, you should be able to:
Because resources are limited (scarce), every person, business, and government has to make choices. You simply cannot have everything. Whenever you choose one thing, you have to give up something else.
Opportunity cost is the next best alternative you give up when you make a choice. In simple terms: it is what you sacrifice when you pick one option over another.
Think of it this way: if you have $10 and you spend it on a book, the opportunity cost is whatever you would have bought instead — say, a cinema ticket. You chose the book, so the cinema ticket is your opportunity cost.
Key point: Opportunity cost is not every alternative you give up. It is only the next best one — the second-choice option that you wanted most after the one you picked.
Opportunity cost exists because of the basic economic problem: our wants are unlimited, but the resources available to satisfy those wants are limited (finite). Because we cannot have everything, we must choose — and every choice means giving something else up.
Opportunity cost applies to everyone. Below are examples for four groups: consumers, workers, producers, and governments.
Consumers are people who buy and use goods and services.
When a consumer spends money on one thing, that money cannot be spent on something else.
Example: A student has $1,000. She can either buy a laptop or a smartphone. She chooses the laptop.
Another example: A young person must choose between going to university or getting a job straight after school. If they go to university, the opportunity cost is the income (wages) they could have earned by working instead.
Workers face opportunity cost when they choose between jobs. Jobs differ in many ways — the wage paid, chances for promotion, and how enjoyable the work is (called job satisfaction).
Example: A person is choosing between two jobs:
If the person chooses to be a teacher, the opportunity cost is the higher salary and benefits they would have received as a civil servant.
Important point: If the pay or working conditions of the civil servant job improve, the opportunity cost of being a teacher goes up — because now you are giving up even more by not taking that job.
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