Opportunity cost is defined as the value of the next best alternative forgone as a result of making a choice.
The analysis of opportunity cost is very important in consumer buying behavior. It is also a key concept in economics as it implies the choice between desirable but exclusive results.
The opportunity cost affect the daily life decisions because we always look for alternatives. And we always think in terms of the next best possibility. For instance, if you have got $100 to spend, you can do that with friends, watching a movie or buying a present for your loved one.
Remember that one of the cardinal tenets of economics is that resources are scarce. That means every time we choose to use a resource one way, we have given up the opportunity to utilize it another way. That's easy to see in our own lives, where we must constantly decide what to do with our limited time and income. Should we go to a movie or study for next week's test? Should we travel in Mexico or buy a car? Should we get postgraduates or professional training or begin work right after college?
In each of these cases, making a choice in effect costs us the opportunity to do something else. Te alternative forgone is called the opportunity cost. The immediate dollar cost of going to a movie instead of studying is the price of a ticket, but the opportunity cost also includes the possibility of getting a higher grade on the exam. The opportunity cost of a decision includes all its consequences, whether they reflect monetary transactions or not.
Decisions have opportunity costs because choosing one thing in a world of scarcity means giving up something else. The opportunity cost is the value of the good or service forgone.