1.3 Opportunity cost

Opportunity cost directly influences the decisions made by consumers, workers, producers and governments. Referring to the basic economic problem, there are competing uses for the economy’s scarce resources. Thus, there is an opportunity cost when allocating scarce resources.

» Consumers have limited incomes, so whenever they purchase a particular good or service, they give up the benefi ts of purchasing another product.

» Workers tend to specialise (see Chapter 18) — for example, as secondary school teachers, accountants, doctors and lawyers. By choosing to specialise in a particular profession, workers give up the opportunity to pursue other jobs and careers.

» Producers need to choose between competing business opportunities. For example, Toyota has to decide how best to allocate its research and development expenditure in terms of developing its petrol-fuelled cars or its hybrid electric cars.

» Governments constantly face decisions that involve opportunity cost. If a government chooses to spend more money on improving the economy’s infrastructure (such as improving its transportation and communications networks), it has less money available for other uses (such as funding education and healthcare).

In general, decision makers will choose the option that gives them the greatest economic return. For example, a government might prioritise welfare benefi ts over its expenditure on national defence or repaying the national debt.