What does the term 'opportunity cost' refer to?

The term 'opportunity cost' refers to the benefit lost when one alternative is chosen over another. This concept illustrates the trade-offs individuals and businesses face when making decisions, highlighting that every choice involves forgoing the potential benefits of the next best alternative. For example, if you decide to spend your time studying for an exam instead of going out with friends, the opportunity cost is the enjoyment and social benefits you miss out on by not going out. Understanding opportunity cost helps in making more informed financial and personal decisions, as it encourages consideration of the consequences and benefits associated with different choices. Evaluating opportunity costs is essential for efficient resource allocation in personal finance and investment strategies.