Cambridge IGCSE Economics 0455
Syllabus points
- Define opportunity cost and its influence on decision-making.
- Explain how opportunity cost applies to consumers, workers, firms and governments.
What is opportunity cost?
Because resources are scarce, choosing one thing means giving up another. Opportunity cost is the next best alternative given up when a choice is made. It is *not* the money spent, but the best option you sacrificed.
Scarcity forces a choice → the choice sacrifices the next best alternative → that sacrifice is the opportunity cost.
Key definitions
| Term | Definition |
|---|---|
| Opportunity cost | The next best alternative given up when a choice is made. |
| Trade-off | Balancing one benefit against another when making a decision. |
Opportunity cost for each decision maker
- Consumers — spending income on one good means not buying another (a new phone instead of a holiday).
- Workers — choosing one job means giving up the pay or satisfaction of another; choosing to work means less leisure.
- Firms — using resources to make one product means not making another; spending on new machines means less on advertising.
- Governments — spending tax revenue on hospitals means less for schools or defence.
Thinking about opportunity cost leads to better decisions, because it forces people to compare what they gain with what they give up.
Worked example
A government has a fixed budget and decides to build a new hospital rather than a new school. The opportunity cost is the benefit the school would have provided — better education for students — assuming the school was the next best use of the money. The financial cost is what the hospital costs; the opportunity cost is the sacrificed school.
Common exam mistakes
- Saying opportunity cost is "the money you pay" — it is the *alternative given up*.
- Listing every option given up — it is only the *next best* one.
- Forgetting that free time (leisure) is an opportunity cost of working.
Exam technique
Always name the specific next best alternative in the context of the question, and state the assumption that it was the second-choice option. This earns application marks.
Quick revision
- Opportunity cost = next best alternative sacrificed.
- Applies to consumers, workers, firms and governments.
- It is the sacrificed option, not the money spent.