Business choices: opportunity cost and trade-offs

Opportunity cost

Opportunity cost is the benefit of the next best alternative that is given up when a choice is made. (The October 2024 WBS11 mark scheme definition: the benefit of the next best alternative (1) that is given up (1).)

Examples:

• A firm spends $50,000 on advertising instead of a new machine: the opportunity cost is the extra output and lower costs the machine would have brought.
• An entrepreneur leaves a $30,000 a year job to start a business: the opportunity cost includes the salary and job security given up.
• A manager's time spent on recruitment cannot be spent on planning.

Opportunity cost is about the next best alternative only, not every alternative.

Trade-offs

A trade-off is when gaining more of one thing means accepting less of another, because two objectives or factors compete.

Common business trade-offs:

• Ethics versus profit: ethical sourcing raises costs (the January 2022 WBS11 paper asked whether there was a trade-off between an ethical stance and profit).
• Quality versus cost in the design mix.
• Short-term profit versus long-term growth: investing now reduces this year's profit.
• Growth versus control: raising finance by selling shares dilutes the founder's control.
• Work versus lifestyle for entrepreneurs (satisficing).

Good decisions weigh the trade-off using objectives, data and the likely reactions of stakeholders.

Using these in exam answers

Opportunity cost and trade-offs make excellent evaluation: 'However, the $2m spent on sponsorship has an opportunity cost: it cannot be used to cut prices or open new stores.' Always name the specific alternative given up and say why it matters in the context.

Worked example

A small bakery has $20,000 to spend. It can buy a new oven (raising output by 30%) or open a delivery service. It chooses the oven. Identify the opportunity cost.

1. List the alternatives: oven or delivery service.
2. The chosen option is the oven.
3. The next best alternative given up is the delivery service and the extra sales it would have generated.

Answer: The opportunity cost is the delivery service and the revenue it would have brought.

Check yourself

1. Define opportunity cost.
   Show answer

   The benefit of the next best alternative that is given up when a choice is made.. Pearson: benefit of the next best alternative (1) given up (1).

2. A student entrepreneur spends Saturday running her online shop instead of working a paid shift for $80, which was her next best option. What is the opportunity cost?
   • The $80 wages from the shift
   • The cost of running the online shop
   • All the things she could have done on Saturday
   • Nothing, because she chose freely
   Show answer

   The $80 wages from the shift. Only the next best alternative counts.

3. A chocolate maker switches to Fairtrade cocoa, raising its costs. Which trade-off does this illustrate?
   • Growth versus control
   • Speed versus accuracy
   • Ethics versus profit
   • Supply versus demand
   Show answer

   Ethics versus profit. Ethical sourcing raises costs and may cut margins.

4. An entrepreneur gives up a job paying $36,000 a year to run a business that makes $28,000 profit in its first year. By how much is she worse off financially in the first year?
   Show answer

   $8000. 36,000 - 28,000 = $8,000.

5. Explain why there may be a trade-off between short-term profit and long-term growth.
   Show answer

   Spending on investment such as new machinery, research or training raises costs now, reducing this year's profit, but should increase sales and profit in future.. Investment costs now, benefits later.

6. Which sentence uses opportunity cost well as evaluation in an answer about a $2m sponsorship deal?
   • Sponsorship is a type of promotion
   • However, the $2m cannot then be spent on price cuts that might attract more price-sensitive customers
   • The firm has $2m
   • Sponsorship is good for brands
   Show answer

   However, the $2m cannot then be spent on price cuts that might attract more price-sensitive customers. It names the specific alternative given up and why it matters.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (2018)
• Pearson WBS11/01 mark scheme, January 2022
• Pearson WBS11/01 mark scheme, October 2024 series (published January 2025)

Last updated 8 November 2026. Spotted a mistake? Tell us.