What does the term "opportunity cost" refer to in economics?

Opportunity cost refers to the value of the next best alternative forgone when a choice is made. This concept emphasizes the trade-offs inherent in decision-making, as resources are limited and choosing one alternative means giving up another. For example, if an individual decides to spend time studying for an exam instead of going out with friends, the opportunity cost is the enjoyment and social interaction that would have come from spending time with friends.

This notion is fundamental in economics, helping individuals and businesses weigh the benefits of various options against what they would be sacrificing by not choosing the alternative. Understanding opportunity cost enables better decision-making, as it forces one to consider what they are giving up when choosing a particular route. It also illustrates that costs are not solely monetary; they can include time, satisfaction, and other resources.