What is the concept of opportunity cost?

Opportunity cost is a fundamental concept in economics and personal finance that refers to the value of the next best alternative that is sacrificed when a particular decision is made. When an individual chooses one option over another, the opportunity cost represents what could have been gained had the alternative been pursued instead. This concept encourages individuals to consider not only the explicit costs of their choices but also what they are potentially giving up by not selecting the other available options.

For instance, if a person decides to spend their savings on a vacation instead of investing that money in the stock market, the opportunity cost would be the potential returns they could have earned from that investment. This highlights the importance of evaluating all possible choices when making financial decisions, ensuring a more informed and effective approach to resource management.