What is opportunity cost?
In short
Opportunity cost is what you give up when you choose one thing instead of the next best use of the same time or money.
In plain words
Every choice spends a scarce resource. The cost is not only the price on the tag. It is also the other good thing you can no longer have. The real cost of a choice is the best alternative you turned down, not every alternative, and not a past spend you cannot get back.
A simple example
You have a free evening. You can work an extra shift for £70, or go to a friend's birthday. If you take the shift, the opportunity cost is the evening you missed, not the £70 — the £70 is what you gained. If you go to the party, the opportunity cost is the £70 you did not earn, if that shift was your next best use of the time. Only the next best alternative counts.
Why it matters
Households meet it in small ways: paying down an expensive credit card versus a night out. Governments meet it in large ones: money spent on one programme cannot fund another. A service that looks free at the point of use still has an opportunity cost, because the staff and the money could have done something else. Ignoring that is how diaries and budgets fill up with second-best plans.
Easy to mix up
Opportunity cost is not the same as the money price. A cheap class that takes your only free afternoon can cost more, in opportunities, than a dearer one at a better time. It is also not a sunk cost. Money you have already spent and cannot recover should not decide the next step. The opportunities from here forward should.