What does opportunity cost represent in decision-making?

Opportunity cost represents the value of the next best alternative foregone when making a decision. It reflects the benefits that could have been gained by choosing a different option instead of the one that was selected. In any decision-making process, when resources such as time, money, or effort are limited, choosing one option means giving up others. This lost potential is crucial to understand as it helps individuals and businesses evaluate whether the selected choice is worth the sacrifice of the alternatives.

For example, if you decide to spend money on a concert ticket instead of saving that money for a new phone, the opportunity cost is the benefit you would have gained from the phone—such as improved communication, convenience, or enjoyment. Recognizing opportunity costs ensures that decisions are made with a complete understanding of what is being sacrificed, ultimately leading to more informed and rational choices in personal finance and economic planning.