Scarcity forces a choice. Every choice means giving up an alternative use of scarce resources. The value of the next best alternative foregone is called opportunity cost. It is not everything that is given up: it is the most valuable option that was realistically available but not chosen.

Suppose a student has one free evening and chooses to revise. They may also have been able to watch a film, work for pay or visit friends. If the paid shift was their most valued alternative, the opportunity cost of revision is the income and experience from that shift — not the film and visit as well. Ranking alternatives is essential.

Most choices have several rejected alternatives. Only one can be the opportunity cost: the next best. To find it, ask which rejected option the decision-maker would have chosen if the selected option had not been available. This depends on the person's, firm's or government's priorities, so use the information in the scenario rather than guessing your own preferences.

Opportunity cost is not always measured in money. It can be income, output, time, leisure, environmental quality or a public service that is not provided. A council that uses land for a road may give up homes, green space or a hospital site. The relevant cost is the most valuable alternative use in that particular setting.

Consumers have limited income and time. Spending on a new phone may mean postponing a holiday, reducing savings or buying fewer other goods. The opportunity cost is whichever of these alternatives the consumer values most. Even apparently small choices such as taking a taxi rather than a bus can have an opportunity cost: money is committed to one use rather than another.

Workers choose between occupations, training, hours of work and leisure. A worker who takes a full-time course may forego wages from employment; a worker who accepts a job in a different city may forego time with family or another local job. The key is to state the best alternative that the worker actually could have chosen.

Firms decide how to allocate premises, employees, machinery, materials and finance. A café with limited kitchen capacity may choose to make more sandwiches at lunchtime and fewer cakes. If cakes were the next most profitable use of the oven, the profit or output from cakes is the opportunity cost of making the extra sandwiches.

Firms also face opportunity costs when they invest. Money used to buy a new delivery vehicle cannot at the same time be used for a new website, staff training or a different machine. These decisions are comparisons between alternative uses of scarce capital and finance.

Governments allocate tax revenue, public land and public-sector workers between competing aims. Building a new hospital may mean delaying a road, school, housing scheme or environmental project. The opportunity cost is the most valuable of the alternatives not provided, taking account of the government’s aims and citizens’ needs.

The money price of an item is the amount paid to buy it. Opportunity cost is the value of the best alternative that the buyer gives up. They may be related because a purchase uses income, but they are not identical. A free ticket can still have a high opportunity cost if using it means giving up a highly valued activity. An expensive item may have a lower opportunity cost for a buyer who has no attractive alternative use for the money.

Opportunity cost can change when preferences, technology, income, resource availability or alternative uses change. If a worker receives a much better job offer, the opportunity cost of studying rather than working rises. If a firm installs another oven, making cakes may no longer require giving up sandwiches, so the opportunity cost of its output decision can fall.

When a question gives a choice, do not jump straight to a generic definition. First identify the resource that is scarce, then state the decision made, then identify the next best alternative available in the scenario. Finally, explain what is lost from that alternative. This turns a definition into an applied economic explanation.

Opportunity cost is a building block for production possibility curves: moving resources towards more of one output means giving up some of another output. It also explains why markets use prices and why governments must prioritise. At this stage, the essential skill is to reason from a single choice to the next best use of its resources.