Final answer:
Opportunity cost is the value of the next best alternative that is given up when making a choice. It is not only the monetary cost but also includes non-monetary factors such as time and pleasure. It is essential for decision making across various aspects of life and business.
Step-by-step explanation:
The cost of sacrifice that is incurred in order to obtain an alternative is called opportunity cost. Opportunity cost represents the benefits an individual, investor, or business misses out on when choosing one alternative over another. While it can often be represented by the actual price paid in a transaction, opportunity cost also encompasses the non-monetary costs such as time, pleasure, or any other benefit that provides utility.
For instance, if you decide to spend time studying for an exam instead of going out with friends, your opportunity cost is the enjoyment and social experience you would have had if you chose to go out. Similarly, if a company decides to allocate budget to a marketing campaign, the opportunity cost is any other initiative or investment the company could have spent that budget on, such as research and development, new equipment, or employee training.
Opportunity cost is a crucial consideration for decision making in finance, but it can apply to a multitude of scenarios in everyday life, as it involves understanding the potential benefits that are forfeited when one option is chosen over another.