Explain opportunity cost

Opportunity cost is the cost of sacrificing the next best alternative to the activity under consideration. In order to explain this I will use a literal example. You are going to watch a football match. There are two tiers of tickets, the cheaper ticket is £25 and the more expensive ticket is £30. The reason for the difference in ticket prices is due to a difference in view of the pitch. The more expensive ticket has a better view of the pitch and the cheaper a worse view. There are also refreshments available at the stadium which cost £5 each. You are given a budget of £30. One option is to pay £30 for the more expensive ticket for the better view, here what you are sacrificing is the ability to buy a refreshment because you have spent all your budget on the ticket and so the opportunity cost here is the refreshment. Whereas, another option is that you spend £25 on the cheaper ticket with the worse view of the pitch but have £5 left of the budget to spend on buying a refreshment, here you are able to buy a refreshment but because you spend less on the ticket you get a worse view of the pitch and so the opportunity cost here is the better view of the pitch.

Answered by Edward H. Economics tutor

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