What does 'opportunity cost' refer to?

The concept of 'opportunity cost' pertains to the value of the next best alternative that is forgone when making a choice. When an individual or business decides to allocate resources (such as time, money, or effort) towards one particular option, they are effectively sacrificing the potential benefits they could have gained from the other alternatives they did not choose.

For example, if you decide to spend $100 on a concert ticket instead of saving that money, the opportunity cost would be the enjoyment or benefits you would have derived from saving those funds or spending them on something else, like a new gadget or an investment that could appreciate in value. Therefore, recognizing opportunity cost is crucial in financial decision-making, as it highlights not just the immediate expenditures, but also the long-term implications of any financial choice made. This understanding helps individuals weigh their options more thoughtfully and make informed decisions that align with their goals.