Economics is all about making choices, in order to make best possible use of the scarce resource. Whenever we make a choice among various alternatives, we have to forgo other options. In this context, two economic terms are often misconstrued, which are the trade-off and opportunity cost. While a trade-off denotes the option we give up, to obtain what we want.
On the other hand, the opportunity cost is the cost of the second best alternative given up to make a choice. In other words, it is the cost of the opportunity that is missed and so it makes a comparuison between the project accepted and the rejected one.
Take a read of the article; that attempts to shed light on the differences between trade-off and opportunity cost.
Content: Trade-off Vs Opportunity Cost
|Basis for Comparison||Trade-off||Opportunity Cost|
|Meaning||Trade-off implies the exchange of one thing to get the another.||Opportunity cost implies the value of choice foregone, to get something else.|
|What is it?||The choices sacrificed.||The value of next best alternative.|
|Represents||What is given up to get what is wanted?||What could have been done, with what was given up?|
Definition of Trade-off
In economics, trade-off means the exchange, in which a person sacrifices one or more things for getting a particular product, service or experience. It refers to all the courses of action which could be employed, other than the present one. It is a deal, that arises as a compromise, wherein to obtain a certain aspect we have to lose another aspect.
In other words, while making a selection, we have to accept less of something, for obtaining more of something else, the outcome would be trade-offs. For example: Suppose a company wants to start a project, which requires huge investment and other resources, so the trade-off entails the reduction in certain expenses, in order to invest more in the new project. Hence, tradeoff implies the way of forsaking one or more desirable alternatives, in return for obtaining a specified outcome.
Definition of Opportunity Cost
Opportunity cost or alternative cost, as the name suggest, is the cost of opportunity lost, i.e. an opportunity to generate revenue is lost, because of the scarcity of resources such as labour, material, capital, plant and machinery, land and so on. It is the actual return of the forsaken alternative, which cannot be obtained, due to the scarcity of resources.
As we know that resources are available to us, in a limited quantityr, but these resources have diverse uses, with varied returns. So, the resources are employed to the most productive use, by sacrificing the next best use of the resources. Hence, the opportunity cost is the amount of return that is expected to be generated when the resources are put to the second best alternative.
For example: Suppose after pursuing MBA you have two options available to you. One, to start your own business and earn 10 lakhs per annum or join a company and get 12 lakhs per annum. So, if you commence your own business you will earn 10 lakhs per year, but you will not get 12 lakhs. This 12 lakhs is your opportunity cost, which you will get for serving the company and not starting your own business.
The opportunity cost of a course of action can be different for different individuals or entities, because it is determined by a person’s needs, wants, money and time. Therefore, what is valued more for an individual than any other thing, vary among individuals, while deciding the way in which resources are to be allocated.
Key Differences Between Trade-off and Opportunity Cost
The difference between trade-off and opportunity cost can be drawn clearly on the following grounds:
- The trade-off is a term used to describe the courses of action given up in order to perform the preferred course of action. Conversely, the opportunity cost is defined as the cost of opting one course of action and forgoing another opportunity, to undertake that course of action.
- Trade-off refers to all the other alternatives which are foregone, to do what we want. On the contrary, the opportunity cost is the expected return on an investment, other than the existing one.
- A trade-off represents, what is renounced, to get what is wanted or desired. In contrast, opportunity cost represents, what amount could be received, if the resources are put to the next-highest-valued alternative.
The concept of scarcity gave birth to the notion of trade-off and opportunity cost. These directly apply the principle of scarcity, as people have to decide, which one to choose among various alternatives while spending their time and money. The opportunity cost of choosing a project over the other, i.e. it is the alternative you must give up while making a choice. On the other hand, trade-off refers to all the other actions which we could be doing, apart from what we are doing.