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London School of Economics and Political Science

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Based on the 'Ten Principles of Economics' this student-created video defines and provides examples for the principles of 'Trade-Offs' and 'Opportunity Costs.' The students in this project: Tony Maingi, Clara Da Silveira, JuYeon Kim, Afifa Humaira

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Best Economical Choice?

So now we have a choice between two alternative possibilities. We can either choose one thing or another but not both. For example, we could choose to spend our time knitting or walking but not both. How do we know what the best economical choice is? By calculating the opportunity cost of each choice.

Opportunity cost is a relative concept, which means that you're finding out how much of one thing you can produce in comparison to another thing.

It's All Relative

For example, if the two goods you're interested in are rice and wheat, then the opportunity cost of producing rice will always be in terms of wheat, and the opportunity cost of producing wheat will always be in terms of rice. The opportunity cost of choosing one possibility is the value of the possibility you gave up. It's what you sacrificed. It's not what you chose, but it's the next best alternative.

Let's look at how to calculate opportunity cost using land as an example. In country A, we can use the same amount of scarce resources to produce two things, but we can only choose one thing at a time to produce.

Calculation Examples

Let's say the two things we produce are corn and beef. We can use land to either produce corn or produce beef.

The next thing we need to know in order to calculate opportunity cost is how much corn could we produce compared to how much beef we could produce. And remember that we're using the same amount of resources, so this kind of problem really is going to give us a basis for comparing two alternative choices.

Let's say that in Country A, we can either produce 50 tons of corn, or as an alternative, we can produce 25 tons of beef. This is our tradeoff between producing these two things. Now we have all the information we need to calculate opportunity cost, but we need to know which opportunity cost we're trying to measure based on which possibility we want to choose.

Let's start by looking at it from the corn perspective. The opportunity cost of producing 50 tons of corn is equal to how many tons of beef we could have produced, which of course is 25 tons. Therefore, the opportunity cost is found by solving this equation:

50 tons of corn = 25 tons of beef

What we really want to know is how much beef we could have produced if we choose to produce 1 ton of corn, but the question gave us 50 tons. To reduce this equation down, we divide each side by 25 and this gives us:

2 tons of corn =1 ton of beef

And then reducing it down one more time, gives us:

1 ton of corn = ½ ton of beef.

That's our answer. The opportunity cost of producing a ton of corn is ½ a ton of beef.

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how to calculate opportunity cost - video & lesson transcript | study.com

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How to Calculate Opportunity Cost - Video & Lesson Transcript | Study.com

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So now we have a choice between two alternative possibilities. We can either choose one thing or another but not both. For example, we could choose to spend our time knitting or walking but not both. How do we know what the best economical choice is? By calculating the opportunity cost of each choice.

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Even though they do not appear on a balance sheet or income statement, opportunity costs are real. By choosing between two courses of action, you assume the cost of the option not taken. Since opportunity costs frequently relate to future events, they are often difficult to quantify. Most people will overlook opportunity costs.

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Opportunity Cost facts, information, pictures | Encyclopedia.com articles about Opportunity Cost

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Get information, facts, and pictures about Opportunity Cost at Encyclopedia.com. Make research projects and school reports about Opportunity Cost easy with credible articles from our FREE, online encyclopedia and dictionary.

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Trade-offs create opportunity cost, one of the most important concepts in economics.  Whenever you make a trade-off, the thing that you do not choose is your opportunity cost. Everything has opportunity costs.  If you just bought something, you could have always chosen to buy something else instead.

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Trade-Offs and Opportunity Costs overview by PhDs from Stanford, Harvard, Berkeley. In-depth review of Trade-Offs and Opportunity Costs meaning with chart and explanations

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When we compare the production rates, we can speak in terms of opportunity cost, like this: If we make ten computers, we lose the opportunity to make five cars and vice versa. By reducing this fraction down, we can say the opportunity cost of producing one car is two computers. As you can see, it takes more time and resources to produce a car than it does a computer, and the production possibilities model will show us this visually.

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Similarities Between Opportunity Cost and Trade off

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Similarities Between Opportunity Cost and Trade off

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Both concepts involve selecting an opportunity among different alternatives and sacrificing one or more alternatives as a result. The choice is the common term in both concepts.

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Opportunity cost can be calculated using different types of measurement tools such as consumer choice, competitive advantage, time management, cost of capital, career choice, and production possibilities as showed in the image

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Difference Between Opportunity Cost and Trade Off

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Difference Between Opportunity Cost and Trade Off

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Opportunity Cost and trade off are two different concepts but they're two sides of the same coin. Trade-off is sacrificing a certain option to another opportunity where opportunity cost is the selection result of the opportunity's. Opportunity cost refers the next valuable opportunity. Trade off is a concept that refers to two opportunities or more with choice.

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Main Difference - Opportunity Cost vs Trade Off

Opportunity cost and trade off are two different concepts in economics, but they cannot be separated from each other since they are two sides of the same coin. These two concepts are concerned with the scarcity and the choice. Trade-off is sacrificing a certain option to choose another opportunity whereas opportunity cost is the cost that has to incur as a result of selecting the so-called opportunity. Thus, the opportunity cost is always the result of tradeoff. This is the main difference between Opportunity Cost and Trade Off.

This article explains,

1. What is Opportunity Cost?

2. What is Trade Off?

3. Difference Between Opportunity Cost and Trade Off

What is Opportunity Cost

Opportunity cost is an economic concept which used to discuss choice. It always talks about the highest value of the next opportunity which is given up by the economy to gain the highest value which has been selected. That selection can be between two or more choices. For example "X" is waiting to enroll in the university and at the same time he gets a job opportunity at a company close to his house with a salary $ 50,000 per annum. But, X selects a university far away from his home, and he has to spend $ 40,000 per annum for his studies. By choosing this option, he will lose the earning of $ 50,000. That is the opportunity cost of study. Basically, it is the thing you miss when you are reaching for another option.

Opportunity cost can be calculated using different types of measurement tools such as consumer choice, competitive advantage, time management, cost of capital, career choice, and production possibilities.

What is Trade Off

Trade off is the concept that talks about the situation which sacrificed to gain another situation. When there are multiple opportunities with limited resources, we have to make comparisons among them to select the best. We always select the opportunity which gives the highest benefits and rest of the options will be sacrificed. Trade off can be described as a technique of measurement which measures the most preferred possible alternative. When we make trade off, the thing that we do not choose is called the opportunity cost. Trade off can produce the same results but factors like level of risk, different paths, comfort, can result in different level of complexity and social costs.

Example: You will miss the chance to watch a movie you like if you watch Olympic

Similarities Between Opportunity Cost and Trade off

Both concepts involve selecting an opportunity among different alternatives and sacrificing one or more alternatives as a result. The choice is the common term in both concepts.

Difference Between Opportunity Cost and Trade Off

Definition

Opportunity Cost: Opportunity cost refers to what a person could have done with what was sacrificed.

Trade Off: A trade-off describes what is sacrificed to get something else.

Opportunity

Opportunity Cost: Opportunity cost refers the next valuable opportunity.

Trade Off: Trade off is a concept that refers to two opportunities or more with choice.

Opportunity Cost vs Trade Off - Conclusion

Trade off and opportunity cost are important and useful concepts in economics. They can be used in many business and real life situations. Trade off is sacrificing certain option to get another opportunity whereas opportunity cost is the cost that has to incur as a result of selecting the so-called opportunity. Opportunity cost is the result of trade off.
Image Courtesy: "Three options - three choices scheme" By Jagbirlehl - Own work (CC BY-SA 3.0) via Commons Wikimedia "Ppf2 small" - original uploader was Mydogategodshat at English Wikipedia - Transferred from en.wikipedia to Commons by Jarry1250 using Commons Helper. (CC BY-SA 3.0) via Commons Wikimedia

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Difference Between Opportunity Cost and Trade Off

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Opportunity cost and trade off are two different concepts in economics, but they cannot be separated from each other since they are two sides of the same coin. These two concepts are concerned with the scarcity and the choice.

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Trade-Offs in Economics: Definition & Examples

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Trade-Offs in Economics: Definition & Examples

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In economics, the term trade-off is often expressed as an opportunity cost, which is the most preferred possible alternative. A trade-off involves a sacrifice that must be made to get a certain product or experience. A person gives up the opportunity to buy 'good B,' because they want to buy 'good A' instead. For a person going to a baseball game, their economic trade-off is the money and time spent at the ballpark, as compared to the alternative of watching the game at home and saving their money, plus the time spent driving to the ball game.

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Definition of Trade-Offs in Economics

Have you ever had to make a decision about spending your money today versus tomorrow? For example, you might ask yourself, 'Should I go out to dinner tonight, or would I rather save my money so I can go to the movies tomorrow?' You probably make decisions like this several times a day without even realizing it. Since your resources - such as time and money - are limited, you must choose how to best allocate them by making some trade-offs. Let's learn a little more about trade-offs and why understanding this concept will help you make better decisions about your time and money.

Most of us don't have so much money that we are in a position to buy everything we desire. We must put thought into every purchase and how it affects our bank account. We also must think about what type of satisfaction that purchase will give us. As a result, to get one thing that we like, we usually have to give up another thing that we also may like. Making decisions requires trading off one item against another.

In economics, the term trade-off is often expressed as an opportunity cost, which is the most preferred possible alternative. A trade-off involves a sacrifice that must be made to get a certain product or experience. A person gives up the opportunity to buy 'good B,' because they want to buy 'good A' instead. For a person going to a baseball game, their economic trade-off is the money and time spent at the ballpark, as compared to the alternative of watching the game at home and saving their money, plus the time spent driving to the ball game.

Trade-Off Examples

Going out on Friday night could involve several economic trade-offs. Let's say you really want to go to the bar with your friends. You will likely spend $40 that evening and get home at 1 AM. The first trade-off might be the four hours you are giving up that you could use to perhaps finish your term paper. Another potential trade-off might be the $40 that you need to fill up your car with gas. Finally, you know that you might wake up with a headache and most likely will miss your Saturday morning workout that you look forward to. Who would have thought you were giving up so much to go out for a few hours? The conclusion isn't that you should skip going out with your friends, but rather that you should evaluate the other alternatives, so you can make the smartest decision possible for you.

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trade-offs in economics: definition & examples - video & lesson transcript | study.com

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Trade-Offs in Economics: Definition & Examples - Video & Lesson Transcript | Study.com

# data[].attributes.attachment_link.description
Have you ever had to make a decision about spending your money today versus tomorrow? For example, you might ask yourself, 'Should I go out to dinner tonight, or would I rather save my money so I can go to the movies tomorrow?' You probably make decisions like this several times a day without even realizing it.