Scarcity and opportunity cost
Identify what a decision sacrifices when resources have competing uses.
What you will learn
- Explain scarcity.
- Identify the next-best alternative forgone.
Choices arise from limited resources
Scarcity means available resources are insufficient to satisfy every want. Individuals, firms and governments therefore choose between alternative uses. A resource can be scarce even if it is not rare in everyday language.
Opportunity cost is the value of the next-best alternative forgone. It is not the sum of every rejected option, and it need not be a money payment.
Compare feasible alternatives
To identify opportunity cost, establish the available choices and the preference ordering. If a council chooses a sports centre instead of its next-best plan for a library, the library is the relevant forgone alternative.
An option that was not feasible is not the opportunity cost. Explain the sacrificed benefit rather than simply listing a construction expense.
Worked example
A student can use Saturday to work, study or play sport. They prefer studying, then working, then sport. They choose studying. What is the opportunity cost?
Show the worked solution
- Identify the selected activity: studying.
- Rank the remaining feasible activities.
- Working is the next-best alternative, so its benefit is forgone.
Answer The benefit of working on Saturday
Common mistakes
- Do not add every rejected activity together.
- The selected activity is not its own opportunity cost.
What can you explain now?
A council chooses a park instead of its next-best option, a clinic. What is forgone?
Compare with the explanation
The benefits of the clinic
Opportunity cost is the next-best feasible alternative that the decision prevents.
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These lessons teach the topics represented in our current practice sets. They are not a complete course for every paper or option in the qualification.
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