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Di erence Between Trade-o and Opportunity

Cost
December1,2016BySurbhiS LeaveaComment

Economicsisallaboutmakingchoices,inordertomakebestpossibleuseofthe
scarceresource.Wheneverwemakeachoiceamongvariousalternatives,wehave
toforgootheroptions.Inthiscontext,twoeconomictermsareoftenmisconstrued,
whicharethetradeoffandopportunitycost.Whileatradeoffdenotestheoption
wegiveup,toobtainwhatwewant,theopportunitycostisthecostofthesecond
bestalternativegivenuptomakeachoice.Takeareadofthearticlethatattempts
toshedlightonthedifferencesbetweentradeoffandopportunitycost.
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Content: Trade-o Vs Opportunity Cost

1.ComparisonChart
2.Definition
3.KeyDifferences
4.Conclusion

Comparison Chart

BASISFOR
TRADEOFF OPPORTUNITYCOST
COMPARISON

Meaning Tradeoffimpliesthe Opportunitycostimpliesthe

exchangeofonethingto valueofchoiceforegone,toget
gettheanother. somethingelse.

Whatisit? Thechoicessacrificed. Thevalueofnextbest

alternative.

Represents Whatisgivenuptoget Whatcouldhavebeendone,

whatiswanted? withwhatwasgivenup?
De nition of Trade-o
Ineconomics,tradeoffmeanstheexchange,inwhichapersonsacrificesoneor
morethingsforgettingaparticularproduct,serviceorexperience.Itreferstoall
thecoursesofactionwhichcouldbeemployed,otherthanthepresentone.Itisa
deal,thatarisesasacompromise,whereintoobtainacertainaspectwehaveto
loseanotheraspect.

Inotherwords,whilemakingaselection,wehavetoacceptlessofsomething,for
obtainingmoreofsomethingelse,theoutcomewouldbetradeoffs.Forexample:
Supposeacompanywantstostartaproject,whichrequireshugeinvestmentand
otherresources,sothetradeoffentailsthereductionincertainexpenses,inorder
toinvestmoreinthenewproject.Hence,tradeoffimpliesthewayofforsakingone
ormoredesirablealternatives,inreturnforobtainingaspecifiedoutcome.

De nition of Opportunity Cost

Opportunitycostoralternativecost,asthenamesuggest,isthecostofopportunity
lost,i.e.anopportunitytogeneraterevenueislost,becauseofthescarcityof
resourcessuchaslabour,material,capital,plantandmachinery,landandsoon.It
istheactualreturnoftheforsakenalternative,whichcannotbeobtained,dueto
thescarcityofresources.

Asweknowthatresourcesareavailabletous,inalimitedquantityr,butthese
resourceshavediverseuses,withvariedreturns.So,theresourcesareemployedto
themostproductiveuse,bysacrificingthenextbestuseoftheresources.Hence,
theopportunitycostistheamountofreturnthatisexpectedtobegeneratedwhen
theresourcesareputtothesecondbestalternative.
Forexample:SupposeafterpursuingMBAyouhavetwooptionsavailabletoyou.
One,tostartyourownbusinessandearn10lakhsperannumorjoinacompany
andget12lakhsperannum.So,ifyoucommenceyourownbusinessyouwillearn
10lakhsperyear,butyouwillnotget12lakhs.This12lakhsisyouropportunity
cost,whichyouwillgetforservingthecompanyandnotstartingyourown
business.

Theopportunitycostofacourseofactioncanbedifferentfordifferentindividuals
orentities,becauseitisdeterminedbyapersonsneeds,wants,moneyandtime.
Therefore,whatisvaluedmoreforanindividualthananyotherthing,varyamong
individuals,whiledecidingthewayinwhichresourcesaretobeallocated.

Key Di erences Between Trade-o and Opportunity

Cost
Thedifferencebetweentradeoffandopportunitycostcanbedrawnclearly
onthefollowinggrounds:

1.Thetradeoffisatermusedtodescribethecoursesofactiongivenup
inordertoperformthepreferredcourseofaction.Conversely,the
opportunitycostisdefinedasthecostofoptingonecourseofaction
andforgoinganotheropportunity,toundertakethatcourseofaction.

2.Tradeoffreferstoalltheotheralternativeswhichareforegone,todo
whatwewant.Onthecontrary,theopportunitycostistheexpected
returnonaninvestment,otherthantheexistingone.

3.Atradeoffrepresents,whatisrenounced,togetwhatiswantedor
desired.Incontrast,opportunitycostrepresents,whatamountcould
bereceived,iftheresourcesareputtothenexthighestvalued
alternative.

Conclusion
Theconceptofscarcitygavebirthtothenotionoftradeoffandopportunitycost.
Thesedirectlyapplytheprincipleofscarcity,aspeoplehavetodecide,whichoneto
chooseamongvariousalternativeswhilespendingtheirtimeandmoney.The
opportunitycostofchoosingaprojectovertheother,i.e.itisthealternativeyou
mustgiveupwhilemakingachoice.Ontheotherhand,tradeoffreferstoallthe
otheractionswhichwecouldbedoing,apartfromwhatwearedoing.