1.5.5 Opportunity Costs

Question 1

Describe opportunity costs

Answer 1

• Opportunity cost can be defined as the benefit lost of the next best alternative when making a choice
• As all resources are scarce businesses must make choices in order to allocate these resources
• There are always competing alternatives when making choices e.g. should I buy a Pepsi or a Fanta?
• If I buy a Fanta I have lost the benefit of the closest alternative, a Pepsi
• Opportunity cost is the cost of the next best alternative
• However there may be a range of alternatives all of which have been given up
• All of these alternatives are referred to as ‘trade-offs’