What does the concept of 'opportunity cost' refer to in decision-making?

The concept of 'opportunity cost' refers to the lost benefits that occur when one alternative is chosen over another. In decision-making, individuals and organizations often face multiple choices, each with its own potential benefits. When a decision is made to pursue a specific option, the opportunity cost is the value of the next best alternative that is not selected. This measure helps in evaluating the relative worth of different choices by highlighting what is sacrificed when one option is chosen over others.

Understanding opportunity cost is crucial because it underscores the importance of considering not only the direct costs associated with a decision but also the potential benefits that could have been gained from alternatives. This perspective allows for more informed decision-making, as it emphasizes the trade-offs involved in every choice. Thus, the focus on lost benefits truly captures the essence of opportunity cost in economic and managerial contexts.