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It is based on concept of opportunity cost.

Opportunity cost is the value of next best alternative.

opportunity costindicates what one must give up to obtain what he or she desires. The idea behind opportunity cost is that the cost of one item is the lost opportunity to do or consume something else.

Opportunity cost = Return from the best alternative – Return from the already selected option

For example, a farmer has a fixed area of land in which she cultivates different crops. If the farmer sows rice at a particular time, she can’t produce wheat now as she has already used up her land to produce rice. The gain that the farmer would have earned by cultivating wheat over and above her earnings by sowing rice is her opportunity cost.

A student spends INR 500 on movies a night before exams. The opportunity cost is time spent in studying then money spent on something else.