What is opportunity cost?

Opportunity cost is defined as the cost of the next best alternative foregone when a decision is made. This concept highlights the trade-offs involved in every choice, emphasizing that resources are limited, and choosing one option typically means sacrificing another.

For example, if an individual decides to spend time studying for an exam instead of working a part-time job, the opportunity cost is the wages they would have earned during that time. This reflects the value of the highest-valued alternative that is given up in order to pursue a chosen action.

Understanding opportunity cost helps individuals and businesses make informed decisions by considering what they are sacrificing by not choosing the next best alternative. This principle is fundamental to the study of economics as it illustrates the implicit costs associated with choices, beyond just the monetary ones, which are crucial for effective resource allocation.