Opportunity cost refers to the value of the next best alternative that is given up when making a decision. In other words, it represents the benefits you could have received by choosing a different option. For example, let's say you have $10,000 to invest. You could either invest it in stocks, which may provide a 7% annual return, or you could use it for a down payment on a rental property, which could yield a 10% annual return. If you choose to invest in stocks, your opportunity cost would be the 3% difference in potential return from the rental property investment, as that is the foregone benefit of not choosing the alternative option.
Take the role of an economist and explain the concept of 'opportunity cost' using a real-life example.