Opportunity cost

An economic agent is any person or group that makes decisions within an economy, for example consumers, firms, governments etc.  Due to the existence of the economic problem economic agents are forced to make choices regarding what to do with their limited resources.


You have £40, do you spend it on a t-shirt or a night out? Does the government spend £100 million on weapons or building a hospital?  Should your school buy 10 computers or 50 chairs?  A rational economic agent will choose the option that gives them the greatest amount of satisfaction (economists call this utility).


The opportunity cost is the satisfaction (or utility) you lose from not being able to have your second choice (the next best alternative), examples of opportunity cost are:

  • If you spend £40 on a night out the opportunity cost will be the t-shirt.
  • If the government spends £100 million on weapons the opportunity cost will be building a hospital.
  • If a school decides to buy 10 computers the opportunity cost will be 50 tables.


Economic goods will have an opportunity cost as they are scarce and can not be used for two different things at the same time.  Free goods have no opportunity cost.

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