What is opportunity cost?

Opportunity cost refers to the value of the next best alternative that is given up when making a decision. This concept is crucial in economics and personal finance because it emphasizes that every choice comes with a trade-off. When you choose one option over another, you are not only considering the direct cost of the chosen option but also the benefits you miss out on from the alternatives that you had to pass up. For example, if you decide to spend your time studying instead of going out with friends, the opportunity cost includes the enjoyment and experiences you would have had during that outing.

In this context, the understanding of opportunity cost allows individuals to evaluate their choices more effectively, making decisions that align best with their goals and values. It highlights the importance of considering not just the monetary costs but also the potential benefits lost from the options you didn't choose.