1.1.1 The Economic Problem

Summary notes on Opportunity cost:

Because resources are scarce we have to make choices and we have to give up things. This leads to the concept of opportunity cost

Opportunity cost measures the cost of any economic choice in terms of the next best alternative foregone

Many examples of opportunity cost exist at the level of the individual, the household, the firm, the government and the economy:

• The opportunity cost of deciding not to work is the lost wages foregone

• The opportunity cost of spending money on a foreign holiday is the lost opportunity to buy a new dishwasher or the chance to enjoy two short breaks inside the United Kingdom

• The opportunity cost of the government spending £20 billion on interest payments on the national debt is the extra money it might have allocated to the National Health Service

• The opportunity cost of an economy investing its resources in new capital goods is the current production of consumer goods that is given up

• The opportunity cost of using arable farm land to produce wheat is that the land cannot be used in that production period to harvest potatoes