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Table of Contents

  1. Topic pack - Microeconomics - introduction
  2. 1.1 Competitive Markets: Demand and Supply
  3. 1.1 Competitive Markets: Demand and Supply - notes
    1. The nature of markets
    2. Types of markets
    3. Market structure
    4. Spectrum of competition
    5. Demand
    6. The law of demand
    7. Individual and market demand
    8. Non-price determinants of demand
    9. Movements along the demand curve
    10. Shifts in the demand curve
    11. Example - shifts and movements along a demand curve
    12. Exceptions to the normal law of demand
    13. Linear demand functions
    14. Linear demand functions - example
    15. The law of supply
    16. Non-price determinants of supply
    17. Movements along the supply curve
    18. Shifts in the supply curve
    19. Shifts and moves of supply curve
    20. The real supply curve?
    21. Linear supply functions
    22. Linear supply functions - example
    23. Market equilibrium
    24. Market equilibrium - notes
    25. Excess demand and excess supply
    26. Example 1 - the market for DVD players
    27. Example 2 - the market for fish
    28. Applications of demand and supply
    29. Calculating market equilibrium
    30. Calculating equilibrium - example
    31. Scarcity and choice
    32. Choice and opportunity cost
    33. Price signalling
    34. Market efficiency - consumer surplus
    35. Market efficiency - producer surplus
    36. Allocative efficiency
  4. 1.1 Competitive markets - questions
  5. 1.1 Competitive markets - simulations and activities
  6. 1.2 Elasticities
  7. 1.2 Elasticities - notes
  8. Section 1.2 Elasticities - questions
  9. Section 1.2 Elasticities - simulations and activities
  10. 1.3 Government intervention
  11. 1.3 Government Intervention - notes
  12. 1.3 Government intervention - questions
  13. 1.3 Government intervention - simulations and activities
  14. 1.4 Market failure
  15. 1.4 Market failure - notes
  16. Section 1.4 Market failure - questions
  17. Section 1.4 Market failure - simulations and activities
  18. 1.5 Theory of the firm
  19. 1.5 Theory of the firm - notes (HL only)
  20. Section 1.5 Theory of the firm - questions
  21. Section 1.5 Theory of the firm - simulations and activities
  22. Print View

Choice and opportunity cost

Syllabus: Explain why choice results in an opportunity cost.

When you make a choice to buy something you exchange cash - in one form or another - for a product or service. This choice means that spending the cash on one good means that it cannot also be used to buy something else. This is one form of the concept of opportunity cost. If resources are used to produce one good they cannot also be used to produce something else.

Opportunity cost - the next best alternative foregone.

The opportunity cost of making a choice is the sacrifice made to do it. It is the real cost of the next best alternative foregone when an economic decision is made. The more a nation produces of one thing, the less of something else it can produce. The sacrifice of the alternative is the opportunity cost.

A few examples:

  1. The government chooses to spend more on health care. This may mean sacrifices elsewhere, for example less spent on affordable housing. The reduction in housing is the opportunity cost.
  2. The opportunity cost of you working overtime (supplying more labour) is the leisure time that you have sacrificed.
  3. You own a lawnmower that you rarely use. It has a second hand value of $50. The opportunity cost of keeping the mower is $50.
  4. You are given $400 as an 18th birthday present. You decide to spend it on a holiday rather than put it into a long - term saving account. The opportunity cost of the holiday is the savings that have been given up.
  5. You buy a CD instead of purchasing lunches for a week. The opportunity cost of the CD is the lunches given up.

The fact that there is an opportunity cost to every descision means that we all face trade-offs in the decisions we make. As a society, we cannot have everything we want and so to have more of one thing, we may have to have less of another. This notion of trade-offs is one that will recur throughout your economics course. It will also arise when we look at the management of the national economy as governments face trade-offs as well as individuals. They may want low unemployment and low inflation, but less of one may mean more of the other.

Remember, however, that opportunity cost is not a financial cost - it is a resource cost, i.e. what's given up in real, as opposed to money terms.