Section A: Key terms and recall
Define opportunity cost. [2 marks]
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The cost of the next best alternative that is given up to pursue a certain action. [2 marks]
What is the opportunity cost of studying for an exam instead of watching a movie? [2 marks]
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The enjoyment and relaxation gained from watching the movie. [2 marks]
Give an example of an opportunity cost in everyday life. [2 marks]
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Example: The opportunity cost of buying a new video game instead of saving the money. [2 marks]
How does opportunity cost influence decision-making? [2 marks]
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Opportunity cost influences decision-making by helping individuals and businesses consider the benefits of the next best alternative before making a choice. [2 marks]
What is the opportunity cost of producing one more unit of good X when resources are scarce? [2 marks]
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The amount of good Y that could have been produced with the same resources. [2 marks]
Section B: Applying your knowledge
Sarah has £20 to spend. She can buy 5 CDs or 2 concert tickets. What is the opportunity cost of buying the concert tickets? [2 marks]
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The opportunity cost is 5 CDs. [2 marks]
A farmer can grow either wheat or barley on his land. If he chooses to grow wheat, he will produce 100 bushels. If he chooses to grow barley, he will produce 50 bushels. What is the opportunity cost of growing wheat? [2 marks]
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The opportunity cost is 50 bushels of barley. [2 marks]
A student spends 2 hours studying for a maths exam instead of working at a part-time job where they earn £10 per hour. What is the opportunity cost of studying? [2 marks]
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The opportunity cost is £20 (2 hours * £10 per hour). [2 marks]
A country has to decide between investing in education or military spending. If they invest £1 million in education, they can educate 1,000 students. If they invest £1 million in the military, they can buy 50 new tanks. What is the opportunity cost of investing in education? [2 marks]
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The opportunity cost is 50 new tanks. [2 marks]
Section C: Explain and analyse
Explain how opportunity cost affects the decisions made by businesses. Provide an example to support your answer. [4 marks]
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Opportunity cost affects business decisions by making them consider the benefits of the next best alternative. For example, a business might decide to invest in new technology instead of expanding its workforce. The opportunity cost would be the additional production or services that could have been provided by the new workers. [4 marks]
Analyse the role of opportunity cost in personal financial decisions. Use examples to illustrate your points. [4 marks]
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Opportunity cost plays a significant role in personal financial decisions. For example, when deciding whether to buy a new car or save for a holiday, the opportunity cost of buying the car is the holiday that could have been taken. Similarly, choosing to spend money on dining out instead of cooking at home has the opportunity cost of the savings that could have been accumulated. [4 marks]
Section D: Challenge
A student has £50 to spend on either books, clothes, or entertainment. The student decides to buy 5 books for £20, leaving them with £30. They then buy 2 outfits for £30. What is the opportunity cost of buying the outfits? If the student had spent the entire £50 on entertainment, they could have gone to 10 concerts. What is the opportunity cost of buying the books and outfits? [6 marks]
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The opportunity cost of buying the outfits is 3 concerts (£30 / £10 per concert). The opportunity cost of buying the books and outfits is 8 concerts (£50 / £10 per concert). [6 marks]