Which of the following best defines the concept of 'opportunity cost'?

Correct — B. Opportunity cost is the value of the next best alternative foregone when you make a choice.

Resources are scarce, so using them one way means giving up other uses. The cost of a choice is measured by the best of those forgone uses, not by the money paid → option (b).

Why the others are wrong

• (a)
  The cost of production — The cost of production is the payment for all the inputs used to make a good. It counts what was spent, not the alternative given up.
• (c)
  The cost of labor — The cost of labour is one input cost, the wages paid to workers. It is part of the cost of production, not the value of a forgone choice.
• (d)
  The total money spent — The total money spent is the explicit, or accounting, cost. Opportunity cost can arise with no money spent at all, as when you give up time.

Economics starts from scarcity: land, labour, capital and time all have alternative uses, so every choice gives something up.

If a farmer uses a field for wheat when it could have grown rice, the opportunity cost of the wheat is the rice not grown. Only the best forgone alternative counts, because that is what the choice actually sacrificed.

Key facts

• Opportunity cost is the value of the next best alternative foregone.
• It arises because resources are scarce and have alternative uses.
• Along a production possibility frontier, the opportunity cost of more of one good is the output of the other good given up.

Common traps

• Equating cost with money spent: opportunity cost counts what was given up, even when no money changes hands.
• Adding up every forgone option: only the single next best alternative is counted.

No directly related past PYQ was found.