Define opportunity cost.

Opportunity cost is defined as the value of the next best alternative that is forgone when making a choice. This concept is a fundamental principle in economics as it emphasizes the potential benefits an individual, business, or economy misses out on when choosing one option over another. When a decision is made, resources (time, money, effort) are allocated to the chosen option, and opportunity cost reflects what is sacrificed in terms of other alternatives that could have been pursued.

For instance, if a student decides to spend time studying for an exam rather than going out with friends, the opportunity cost is the enjoyment and experiences the student misses by not spending that time with friends. Recognizing opportunity costs helps individuals and businesses make informed decisions that align with their goals and resource limitations. This understanding is crucial for effective resource allocation in both personal finance and broader economic contexts.