What does the term 'opportunity cost' refer to?

The term 'opportunity cost' refers to the most desirable alternative that is forgone when a choice is made. This concept is fundamental in economics because every decision involves trade-offs; the resources allocated to one option cannot be used for another. Therefore, whenever an individual or entity selects one option over another, they miss out on the benefits that could have been derived from the alternative that was not chosen. Understanding opportunity cost helps individuals and businesses make informed decisions by considering not just the explicit costs associated with their choices but also the value of what they are giving up. This awareness aids in evaluating the relative merits of different potential decisions to allocate resources more effectively.