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The origin of the term is found in the decision-making problem, specially in the choice problem. Regularly economic decisions should be taken following criteria of cost vs profit. The economic approach is to favour activities with the strongest income/cost ratio and discard those ones in which the ratio takes values lower than one. The subject of opportunity cost is peculiar for it implies a cross income-to-income comparison: one activity's potential income should be compared with the potential income of a different and exclusive activity. Therefore it should be understood that the opportunity cost is an income that will not be earned.
Meaning of the term
The opportunity cost is the potential benefit which could result of a certain project considered the alternative to a main project chosen by us, given our belief that the latter one is more advantageous than the former one. Every alternative less advantageous than the chosen project should be included in a ranking list headed by the second best which will be followed by the third best, the fourth best and so on. Opportunity cost is the profit we believe we can get if we choose the 'second best' alternative. Once the potential profit from the chosen project and that of the second best project are compared, we expect to find that the former one should be the biggest one. If this does not happen, then the latter project is chosen and the other one discarded.
An example
Mr. Smith, an economist, receives a certificate which may be exchanged either for pack A consisting in 100 shares of a chemical company, either for pack B consisting in 100 shares of an IT company. Smith has only one resource: his certificate, and must now make his choice between the two alternatives. Additional information coming form the stock market specifies that pack A is assessed to have a US$10,000 performance, while pack B will produce US$7,500, Smith will choose pack A and his opportunity cost will be US$7,500. We can thus state that the cross net profit Smith is getting with his decision is US$2,500.
Exercice
It's Saturday night and you are simultaneously invited to go out by two great friends you equally appreciate. Friend #1 is taking you to the movie premiere of a movie you're sure you'll love. Friend #2 is taking you to the opening of a great italian restaurant, and you happen to adore italian food. Add any premise you find necessary to let you analize the problem. It is very important that you assign a numeric value to the degree of joy or satisfaction each alternative's offering you. At the end you should show in a detailed way what is the opportunity cost you face once your choice is set.
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