What does the term opportunity cost refer to?

Opportunity cost refers to the value of the next best alternative that is forgone when making a choice. It encapsulates the benefits that could have been gained from the option that is not chosen. When you decide to allocate your resources—whether time, money, or effort—toward one option, you forgo the benefits that you would have received from the alternative. This concept is fundamental in economics because it emphasizes the trade-offs that individuals and businesses face when making decisions. It encourages a careful evaluation of options to ensure that the most valuable choice is made, revealing the cost of what must be given up to pursue a specific action. Understanding opportunity cost helps individuals and organizations make more informed and effective choices that maximize their benefits.