Scarcity, Choice & Opportunity Cost
Basic Economic Problem · 3 question types
Exam Frequency Analysis
Past paper frequency (2018 to 2024)
This topic accounts for approximately 14% of your exam marks.
Opportunity cost and scarcity definitions appear on nearly every paper; consistently 4 to 6 marks in Q1 Part A context questions.
Scarcity forces choices; choices have a cost. That cost is .
Opportunity cost is the next best alternative forgone when a choice is made between competing uses of scarce resources.
Two parts of the definition matter equally:
- Next best alternative. Not just any other option, but the single best option that was given up. A choice between three sandwiches has one opportunity cost (the second-favourite), not two.
- Forgone because of a choice. The cost only arises because a decision had to be made. If a resource could do both jobs at once there would be no opportunity cost.
A definition that just says "the cost of a decision" without "next best alternative forgone" loses marks.
Opportunity cost is not always monetary
Opportunity cost can be measured in anything sacrificed: time, the satisfaction of an alternative product, lost income, the next best use of a piece of land. It is always the value of the next best alternative forgone, and that value may be expressed in money (the revenue or income of the option given up) or in non-money terms (time, output, satisfaction). The trap in numerical questions is picking the wrong money figure: it is not the amount spent on, or earned from, the option chosen; not the difference between the two options; and not the two options added together. It is the full value of the next best option not taken.
| Choice made | Opportunity cost |
|---|---|
| Buy a new phone with £600 | The next best item that £600 could have bought (for example a holiday) |
| Spend an evening revising | The next best use of that evening (for example watching a film) |
| Government builds a hospital with tax revenue | The next best public project that tax revenue could have funded (for example a road) |
| Firm uses a field to grow wheat | The next best crop the field could have grown (for example barley) |
| Worker stays in the same job | The next best job they could have taken (with its own pay and conditions) |
| Farmer grows tomatoes earning $12,000 instead of onions earning $9,000 | $9,000, the onion revenue forgone |
Defining opportunity cost (MCQ and identify questions)
What comes up: MCQs directly ask "What is opportunity cost?" or present a scenario and ask you to identify the opportunity cost for a consumer, worker, producer or government.
Write: Opportunity cost is the next best alternative forgone when a choice is made between competing uses of scarce resources.
Watch out: The mark scheme credits "next best alternative forgone/given up/sacrificed" — not "the cost of a decision", "the price paid", or "all alternatives given up". In calculation-style MCQs the opportunity cost is the income or output of the next best option not chosen, which may differ from the money actually spent. For example, if a worker gives up a job paying $30,000 per year to take a traineeship paying $12,000 per year for two years, the opportunity cost over those two years is the $60,000 of salary forgone from the better-paid job — the value of the next best alternative given up (what the worker earns in the traineeship is not subtracted).