What is meant by 'opportunity cost' in economics?

Opportunity cost is defined as the value of the next best alternative that is sacrificed when a choice is made. This concept highlights the trade-offs involved in decision-making and emphasizes that, when resources are limited, choosing one option means forgoing another. For example, if a student decides to spend an hour studying rather than going out with friends, the opportunity cost is the enjoyment and experiences that could have been gained from that social interaction.

Understanding opportunity cost is critical in economics because it helps individuals and businesses assess the relative benefits of different choices. It allows for better decision-making by making individuals aware of what they are sacrificing in order to pursue their chosen path.

This choice effectively captures the essence of opportunity cost, distinguishing it from other financial terms that refer to different aspects of cost, such as the total expenditure of resources or specific budget allocations.