Economics 9708/13 — May/June 2019

Background Concept

Opportunity cost is a fundamental concept in economics that arises from the problem of scarcity. Because resources (including money) are limited, choosing to use them in one way means forgoing the next best alternative use. The opportunity cost is the value of that forgone alternative, measured in terms of the satisfaction or benefit it would have provided.

Understanding the Question

The question asks for the opportunity cost of spending $20 on a new pair of sports shoes. The key is to identify the single best alternative that is given up. The question is a multiple-choice item, testing the precise definition. The options include common misunderstandings: confusing opportunity cost with all alternatives, with other costs like travel, or with the value of existing possessions.

Approach

Recall the definition of opportunity cost. For each option, evaluate whether it matches that definition. The correct answer should be the one that identifies the next best alternative foregone. Eliminate options that are too broad, irrelevant, or refer to other costs.

Step-by-Step Reasoning

1. Start with the definition: opportunity cost = the value of the next best alternative foregone when a choice is made.
2. The choice is to spend $20 on new sports shoes. The alternative use of that $20 is the next best thing the person could have purchased with that money.
3. Option D says: "the next best thing that could have been bought with the $20." This exactly matches the definition.
4. Option A says: "all the other things the person could have bought." This is not correct because opportunity cost is only the next best single alternative, not all alternatives. The person cannot buy all other things; they choose one from many. The worst alternative is not relevant.
5. Option B says: "the cost of getting to the sports shop." This is a separate cost (travel expense) that is not part of the $20 spending decision. It may be a complementary cost but not the opportunity cost of the $20 itself.
6. Option C says: "the current value of his old pair of shoes." The old shoes are a sunk cost or a separate asset; their existing value is not given up by the new purchase. The opportunity cost of the $20 is not related to the old shoes.
7. Therefore, D is the only correct choice.

Key Takeaways

• Opportunity cost is always the value of the next best alternative foregone, not all alternatives.
• It is distinct from other costs like travel expenses or the value of existing possessions.
• Understanding this precise definition is crucial for many economic decisions at all levels.

Common Mistakes

• Choosing A because of the word "all" – students often think opportunity cost includes everything else that could be done, but it is only the single best alternative.
• Confusing opportunity cost with monetary cost – e.g., thinking the cost is just the $20 itself, or the travel cost.
• Thinking the old shoes' value matters – that is a replacement cost or opportunity cost of not selling them, but not directly related to the spending choice.

Things to Be Careful About

• The wording "next best" is the key phrase. Always look for the phrase that identifies the single best alternative.
• In multiple-choice questions, read all options carefully and eliminate those that do not match the precise definition.
• Opportunity cost applies to any decision, not just money – it could be time, resources, etc. But here it is about money.