Opportunity Cost

The cost expressed in terms of the next best alternative sacrificed. It is the loss of other alternatives when one alternative is chosen. Arises because the resources we need to produce goods and services are limited in supply and scarce relative to our wants. Opportunity cost refers to what you have to give up to buy what you want in terms of other goods or services. It perfectly illustrates the basic economic problem.

• Governments must determine how best to spend public money and how they will finance it.

• Producers must decide what goods or services they will produce, how much they will produce, how much money they will invest in firms, where to locate and how best to obtain and organise the resources they need for productions.

Examples:

Consumers: you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can't spend the money on something else.

Workers: additional wages from overtime or use the time to go to the cinema?

Producers: invest in new machinery or increase training of workers?

Government: new school or new hospital?