In microeconomic theory, the opportunity cost of a particular activity option is the loss of value or benefit that would be incurred by engaging in that activity, relative to engaging in an alternative activity offering a higher return in value or benefit.
This can be explained more clearly through the help of an example. A clerk gets Rs 800 per month for giving private tuition after office hours but for that he foregoes Rs 500 which he would have got for working overtime after office hours. In this case, Rs 500 is the opportunity cost of giving tuition. Alternatively, remuneration lost is termed as opportunity cost and that is why it has been termed as the cost of foregone alternative.
IMPORTANCE: The concept of opportunity cost is very important in the context of use of factors of production (or resources). Since the supply of factors is scarce and can be put to alternative uses, therefore, a factor can be utilized in one use sacrificing its use for other purposes. Further, it helps economists to know how limited resources get allocated in different branches of production. For example an economy can produce more wheat by sacrificing production of some other commodity say sugarcane.
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