What is meant by 'opportunity cost'?

Opportunity cost refers to the concept that when a choice is made, the potential benefits or gains that could have been obtained from the next best alternative are considered lost. In economic terms, it highlights the cost of foregoing one option in favor of another. This principle is crucial for decision-making because it emphasizes the significance of evaluating what is sacrificed when opting for a particular course of action.

For instance, if a company decides to invest its funds into project A instead of project B, the opportunity cost is the potential profit that could have been generated from project B. Understanding this concept allows individuals and businesses to make more informed choices by weighing the potential returns of different alternatives against one another.