Q. In economics, one often encounters the concept of opportunity cost. What does opportunity cost mean?
Answer: It is the gain foregone from the second best activity.
Notes: Opportunity cost: Opportunity cost of some activity is the gain foregone from the second best activity. Suppose you have Rs. 1,000 which you decide to invest in your family business. What is the opportunity cost of your action? If you do not invest this money, you can either keep it in the house-safe which will give you zero return or you can deposit it in either bank-1 or bank-2 in which case you get an interest at the rate of 10 per cent or 5 per cent respectively. So the maximum benefit that you may get from other alternative activities is the interest from bank-1. But this opportunity will no longer be there once you invest the money in your family business. The opportunity cost of investing the money in your family business is therefore the amount of forgone interest from bank-1.