Opportunity Cost - Sanjay Rajawat

Opportunity Cost is the next best alternative that is forgone while making a decision.
- Examples:
  - Consumer has a choice to either buy a chocolate or a pen and if he/she chooses a chocolate then buying a pen becomes the opportunity cost.
  - Apple has a choice to produce more iPads or iPhones and if they chose to produce more iPhones, producing iPads becomes the opportunity cost.
  - If a worker has option to chose either for working more hours or have more leisure time, if he chooses to work for more hours than leisure time lost is the opportunity cost.
  - If the government has choice to build either a school or a hospital and if they choose to build a school than building a hospital becomes the opportunity cost.
  - If a student has choice between selecting Economics or History and if chooses Economics then History becomes the opportunity cost.
Opportunity cost for a firm: A firm has limited capital, labour and factory space, so choosing one use means giving up another.
- Example: Tata Motors has limited capital. Investing ₹1,000 crore in a new EV plant means it cannot use that money to expand its SUV range, so the SUV expansion is the opportunity cost.
Worked examples of opportunity cost:
- Student: A student can attend a 2-hour tuition class or work at a part-time job paying ₹300 an hour. If she chooses the class, she gives up ₹600 of earnings, so ₹600 is the opportunity cost.
- Farmer: A Gujarat farmer can plant cotton or groundnut on the same field. If he chooses cotton, the income he would have earned from groundnut is the opportunity cost.
- Government: The Union Budget puts ₹1 lakh crore into railways. The opportunity cost is the next best use of that money, such as primary healthcare, which now receives less funding.

Common Mistakes That Lose Marks

The trap is in bold. Read the fix after it.

Listing several alternatives. Opportunity cost is the next best alternative given up: one item. If you watched an IPL match instead of revising, and revising was your next choice, the opportunity cost is the revision, not “revision, sleep and football”.
“Opportunity cost is the money spent.” Wrong. ₹500 is the price. The opportunity cost is the best thing that ₹500 (or that time) could have been used for instead, such as the book you can no longer buy.
Being vague. Name the real item from the question. If the government builds a flyover instead of a hospital, the opportunity cost is the hospital, not “other things”.
“Free means no opportunity cost.” Wrong. A free midday meal still uses food, cooks and money that could have gone elsewhere. Someone, here society, still gives something up.
Using the wrong decision-maker. Every agent faces opportunity cost: a worker (overtime vs leisure), a firm (new machine vs advertising), a government (defence vs education). If a firm exports, the opportunity cost is the sales it could have made at home, not “importing”.
Defining it but not using it. If asked how it affects a decision, explain the comparison: the decision-maker weighs the benefit of each option and chooses the one worth giving the other up for.

Exemplar Questions

Explain the opportunity cost to a firm of investing in a new machine. (4 marks)
- Opportunity cost is the (next) best alternative forgone (1).
- The money spent on the machine could have been used to hire more workers or fund advertising (1).
- The firm loses the extra output / profit it would have earned from that alternative use (1).
- Installing the machine may also stop production for a time, so output is lost (1).
Explain the opportunity cost to the government of building a new metro line. (4 marks)
- Opportunity cost is the (next) best alternative forgone (1).
- The funds could have been used to build a hospital or schools instead (1).
- Those services are lost, e.g. fewer patients treated or fewer school places (1).
- Other projects receive less money, or taxes must rise to pay for the metro (1).
Explain why the opportunity cost of becoming a teacher for one worker may be greater than for another worker. (4 marks)
- Opportunity cost is the (next) best alternative (1) forgone (1).
- One worker may have earned more than another (1) and so would be giving up more earnings (1).
- One worker may give up more non-wage benefits (1) example e.g. promotion chances (1).
- One worker has further to travel to work / higher costs of travelling (1) loss of leisure time / time with family / lower net income (1).
Explain the possible opportunity cost to India of exporting more textiles. (4 marks)
- Opportunity cost is the (next) best alternative (1) forgone (1).
- Textiles that have been exported might have been sold on the home market (1) may have increased choice (1) lowered price (1).
- Resources may have been moved to producing the textile exports / resources used to produce textiles could have been used to produce other products (1).
- Output / exports of other products may have been reduced (1) these products may provide more revenue / lose revenue from not exporting these products (1).
What may be the opportunity cost of building an airport? (2 marks)
- Opportunity cost is the (next) best alternative foregone (1).
- E.g. building a hospital (1).