Opportunity cost refers to the value of the next best alternative that must be forgone when a decision is made to pursue a particular course of action.

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In other words, it is the cost of choosing one option over all other available alternatives.

Here’s a simplified example to illustrate opportunity cost:

Let’s say you have $100, and you have two options for how to use it:

Option A: Invest the $100 in stocks, which you estimate will earn you a return of 5% per year.
Option B: Use the $100 to enroll in a cooking class, which you estimate will provide you with valuable culinary skills and potentially lead to a new job opportunity that pays $500 more per year.

If you choose Option A, the opportunity cost is the potential benefit you would have gained from Option B, which is the $500 increase in annual income. Conversely, if you choose Option B, the opportunity cost is the potential return you would have earned from Option A, which is 5% of $100, or $5 per year.

In summary, opportunity cost is the value of the next best alternative foregone when a decision is made, and it is an important concept in economics and decision-making because it helps individuals and businesses evaluate trade-offs and make informed choices about resource allocation. By considering opportunity costs, decision-makers can assess the full implications of their decisions and strive to maximize their overall benefit or utility.