Opportunity cost and Trade off both are terms we come across when we have decisions to make in the financial arena of our business. The trade off and opportunity cost both are partially linked to each other with the former (trade off) helping to evaluate the later (opportunity cost).
Trade off generates opportunity costs. Whenever a trade off is made, the choice that is not opted for is opportunity cost. Trade off can vary depending on the choices that are made and what is viewed as the next best alternative. There is no particular method to calculate trade off, calculating trade off is not the easiest path.
Main Differences Between Opportunity Cost and Trade Off
- The main difference between opportunity cost ad trade off is that opportunity cast determines the value of the next best alternative whereas trade off determines the choices that have been already sacrificed
- In opportunity cost, an individual looks for the nest best alternative whereas in the case of trade off the services have already been sacrificed in the process of determining that one wants.
- In opportunity cost that losses that have been experienced are not considered wherein the trade off, there is no such direct link to what one has sacrificed for.
- In opportunity cos, the preference of better choices is made wherein trade off the price of other possessions are at cost.
- Opportunity cost refers to the profit that has already been lost on the other hand trade off does not with profit or loss.
- Opportunity cost can be calculated by subtracting the value of the preferred option from the value of the next most worthwhile choice while in case of trade off it can to be calculated in any such manner.
Conclusion
Often in economics two terms are confused with each other which are opportunity cost and trade off. The two concepts are brought up while making use of the scarce resources ones business in the best possible way. Both the factors can be distinguished under several factors such as meaning, evaluation, choices made, the risk taken, profit/loss, and calculation.
Opportunity determines the cost of the next best alternative that has been given up in the process of making a choice while for trade off it implies the options, we leave behind to receive a particular service.
Both these terms directly link to the principles of scarcity as people are left with the options to choose from and decisions have to be made. In opportunity cost, a choice is made leaving the other potential or non-potential choices hence the property of giving up of choice is noticed. In the case of trade off, it implies to all the actions we could have been doing apart from what we are doing. Opportunity cost denotes what could have been profited if the next best alternative was chosen. Trade off denotes all that we have abandoned to receive the choice that one desires.
References
- https://dl.acm.org/doi/abs/10.1145/1138929.1138946
- https://www.jneurosci.org/content/36/37/9516