27/08/2026
O Level Economics
Topic: Opportunity Cost?
Opportunity cost is the next best alternative forgone when a choice is made.
The key idea is:
Scarcity → Choice → Opportunity Cost
Because resources are scarce, people cannot satisfy all their wants. Therefore, they have to make choices. When one choice is made, the next best alternative is sacrificed.
Example
A student has two hours. He can:
study Economics or watch a movie.
If he chooses to study Economics, the opportunity cost is the benefit he would have received from watching the movie.
Why does Opportunity Cost arise?
Opportunity cost arises because of scarcity.
In Economics, human wants are unlimited.
Resources are limited.
Resources have alternative uses.
Therefore, choices have to be made.
Every choice involves a sacrifice.
The economic problem
Unlimited wants + Limited resources = Scarcity
Scarcity → Choice → Opportunity Cost
Opportunity Cost for Consumers
Consumers have limited income but many wants.
Example
Ali has Tk. 2,000. He can buy:
a pair of shoes or a shirt.
He chooses the shoes.
Opportunity cost = the benefit he would have received from buying the shirt.
Exam explanation
Consumers face opportunity cost because their income is limited. If they spend their income on one product, they cannot use the same money to buy their next best alternative.
Opportunity Cost for Workers
Workers have limited time and must choose how to use it.
Example
A person can either work overtime and earn extra income or spend the evening with his family.
If he chooses to work overtime, the opportunity cost is the benefit of spending the evening with his family.
The opportunity cost is not necessarily money.
Opportunity Cost for Businesses
Businesses have limited resources such as:
land
labour
capital
finance
time
Therefore, businesses must decide how to use these resources.
Example
A business has Tk. 10 million. It can:
A: Buy new machinery
B: Open a new branch
If it buys the machinery:
Opportunity cost = the benefit from opening the new branch.
Business impact
Buying machinery may:
increase productivity
reduce average costs
increase output
But the business loses the potential benefits of opening the new branch.
Therefore, the business should compare the benefits of both alternatives.
Opportunity Cost for Governments
Governments also face scarcity.
Government revenue is limited, but there are many demands for spending.
For example, the government may have to choose between:
education
healthcare
roads
defence
social welfare
Example
If the government spends Tk. 100 billion on healthcare instead of education:
Opportunity cost = the benefits that could have been obtained from spending the Tk. 100 billion on education.
The government must consider which use of resources provides the greatest benefit to society.
Opportunity Cost and Factors of Production
The four factors of production have alternative uses.
Factor
Example of choice
Opportunity cost
Land
Rice or vegetables
Benefit from vegetables
Labour
Teaching or another job
Benefit from the other job
Capital
Machinery or shop
Benefit from the shop
Enterprise
Produce product A or B
Benefit from product B
This is important in O Level Economics because opportunity cost is closely connected with the allocation of scarce resources.
Opportunity Cost and Production
A business cannot produce unlimited quantities because its resources are limited.
Suppose a factory can produce either:
1,000 tables, or
2,000 chairs.
If it uses resources to produce tables, it gives up the opportunity to produce chairs.
Therefore:
Opportunity cost of producing tables = the chairs forgone.
This shows the basic economic problem of choice and resource allocation.
9. Opportunity Cost vs Actual Cost
This is a common examination area.
Actual/financial cost
The money spent on something.
Opportunity cost
The benefit of the next best alternative forgone.
Example
A business spends $50,000 on machinery.
The $50,000 is the financial expenditure.
If the next best alternative was opening a new shop, the opportunity cost is the benefit the new shop could have generated.
10. Opportunity Cost Is Not Always Money
This is an important point for students.
Opportunity cost can be:
income
leisure
education
profit
production
satisfaction
other benefits
Example
A student chooses to attend university instead of working.
The opportunity cost may be:
The income the student could have earned by working.
But attending university may provide future benefits such as higher income and better employment opportunities.
Opportunity Cost and Decision-Making
Opportunity cost helps economic agents make rational decisions.
Consumer
Which product gives me the greatest benefit?
Business
Which investment will give me the greatest return?
Government
Which spending option will provide the greatest social benefit?
Therefore:
Opportunity cost helps resources move towards their most valuable use.
Opportunity Cost and the PPF
Opportunity cost can also be shown using a Production Possibility Curve/Frontier (PPC/PPF).
If an economy produces more of one good, it may have to produce less of another good.
For example:
More consumer goods → fewer capital goods
The capital goods sacrificed represent the opportunity cost of producing additional consumer goods.
A Strong O Level Answer Structure
For a question such as:
Explain the opportunity cost of a government spending more money on education.
Use:
WHAT
Define opportunity cost.
WHY
Explain scarcity.
EFFECT
Identify the alternative forgone.
EXPLAIN
Explain the consequence of the choice.
CONCLUSION
Make a judgement where appropriate.
Model answer
Opportunity cost is the next best alternative forgone when a choice is made. Government resources are scarce, so the government cannot spend unlimited amounts on all sectors. If it increases spending on education, it may have to reduce spending on healthcare. Therefore, the opportunity cost is the benefit that could have been obtained from the next best use of the resources, such as healthcare. The government should therefore consider which use of its scarce resources provides the greatest benefit to society.
