Opportunity Cost
microeconomics concepts.
1. Opportunity Cost
Opportunity cost is the value of the next-best alternative you give up when you make a choice.
Because resources such as money, time and labour are limited, choosing one option means giving up another.
Example
Suppose you have R500.
You can either:
Buy a pair of shoes for R500, or
Use the R500 to advertise your business.
If you buy the shoes, the opportunity cost is the business advertising you could have purchased instead.
Opportunity cost = the benefit of the next-best alternative forgone.
Another example: time
Suppose you have 3 hours available.
You could:
Work and earn R600, or
Watch movies.
If you choose to watch movies, your opportunity cost is R600 of potential earnings.
Important point
Opportunity cost isn’t necessarily money. It can be:
Money 💰
Time ⏰
Income
Experience
Production
Entertainment
Other opportunities
Learn more
A Production Possibility Frontier (PPF) is often used to illustrate opportunity cost because producing more of one good generally means sacrificing some production of another.
2. Price Elasticity of Demand
Price elasticity of demand (PED) measures how strongly the quantity demanded of a product responds to a change in its price.
In simple terms:
“If I change the price, how much will customers change the amount they buy?”
The basic formula is:
PED = % change in quantity demanded ÷ % change in price
Economists often use the absolute value when classifying elasticity.
Example
Imagine a product costs R100 and the price increases by 10%.
The quantity demanded falls by 20%.
PED = 20% ÷ 10% = 2
Because PED is greater than 1, demand is elastic.
The four main types
PED
Type
Meaning
> 1
Elastic
Quantity changes proportionally more than price
< 1
Inelastic
Quantity changes proportionally less than price
= 1
Unit elastic
Quantity and price change proportionally
= 0
Perfectly inelastic
Quantity doesn’t respond to price
Elastic demand
Customers are very sensitive to price.
Example:
A restaurant raises its burger price by 10%, and customers reduce purchases by 25%.
PED = 25% ÷ 10% = 2.5
Demand is elastic.
Products with many alternatives tend to have more elastic demand.
Inelastic demand
Customers are less sensitive to price.
For example, suppose the price of an essential product rises by 10%, but quantity demanded falls by only 2%.
PED = 2% ÷ 10% = 0.2
Demand is inelastic.
Why PED matters to businesses
PED is particularly useful when deciding whether to increase or decrease prices.
Elastic demand
If demand is elastic, increasing price can cause a large fall in sales.
For example:
Price ↑ 10% → Quantity demanded ↓ 25%
The business could potentially lose revenue.
Inelastic demand
If demand is inelastic, increasing price may produce higher total revenue, because sales fall proportionally less than the price increases.
For example:
Price ↑ 10% → Quantity demanded ↓ 2%
This can increase total revenue, assuming other factors remain unchanged.
Opportunity Cost vs PED
The easiest way to remember the difference:
Opportunity cost asks:
“What am I giving up by choosing this?”
Price elasticity of demand asks:
“How much will customers change their buying when I change the price?”
Simple business example
Imagine you have R10,000.
You could spend it on:
Option A: Facebook/TikTok advertising
Option B: New equipment
Choosing Option A means the benefit you could have received from Option B is your opportunity cost.
Now suppose you sell a product for R200 and increase the price to R220.
If your customers dramatically reduce their purchases, your product has elastic demand. If they continue buying almost the same quantity, demand is inelastic.
In short:
Opportunity cost = the cost of a choice in terms of the next-best alternative.
Price elasticity of demand = how responsive quantity demanded is to a change in price.