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Choices and trade-offs
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You make economic choices every day: how to spend your money and your time. This starter builds the habit of asking 'what did I give up?'
Every choice has a cost
Because money and time are limited, choosing one thing means giving up another.
The value of the next best alternative you give up is called the opportunity cost.
If you spend Saturday revising instead of going to the park (your next best choice), the opportunity cost is the trip to the park.
The value of the next best alternative you give up is called the opportunity cost.
If you spend Saturday revising instead of going to the park (your next best choice), the opportunity cost is the trip to the park.
Choices with numbers
You have £24. Books cost £6 and cinema tickets cost £8.
Spend it all on books: 4 books. Spend it all on films: 3 films.
Each film costs £8, the price of 8 ÷ 6 = 1.33 books (to 2 decimal places). So the opportunity cost of one film is about 1.33 books.
Spend it all on books: 4 books. Spend it all on films: 3 films.
Each film costs £8, the price of 8 ÷ 6 = 1.33 books (to 2 decimal places). So the opportunity cost of one film is about 1.33 books.
Trade-offs for everyone
Consumers trade off between products.
Firms trade off between using a factory or workers for one product or another.
Governments trade off between spending areas: more on defence may mean less on schools.
Only the next best alternative counts as the opportunity cost, not every alternative.
Firms trade off between using a factory or workers for one product or another.
Governments trade off between spending areas: more on defence may mean less on schools.
Only the next best alternative counts as the opportunity cost, not every alternative.
A farmer can use a field to grow 30 tonnes of wheat or 20 tonnes of potatoes. She grows wheat. What is the opportunity cost?
- The next best use of the field was potatoes.
- By growing wheat she gives up the potatoes.
Answer: 20 tonnes of potatoes
Limited money and time mean every choice has an opportunity cost: the next best alternative given up. Consumers, firms and governments all face trade-offs.
The interactive lesson includes the diagrams for this topic.
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