What does opportunity cost represent?

Opportunity cost represents the value of the next best alternative that you give up when making a decision. When resources, such as time or money, are allocated to one option, the opportunity cost is what you miss out on by not choosing the other option. This concept emphasizes the trade-offs involved in every decision, reflecting the potential benefits that are lost.

For example, if you decide to invest in Project A instead of Project B, the opportunity cost is the potential return you would have earned from Project B had you chosen that investment instead. Recognizing opportunity costs helps individuals and businesses make more informed choices by weighing potential benefits against what they must forgo.

In contrast, the other options listed refer to specific financial metrics that do not embody the concept of opportunity cost. Some describe actual costs or financing requirements rather than alternatives. This distinction clarifies why the correct representation of opportunity cost is the value of the next best alternative foregone.