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).
Often choices have to be made in business to utilize scarce resources in the best possible way. For both the concepts opportunity cost and trade off a single preference has to be made amongst many other choices, and in each case, other potential or non-potential alternative has to be left behind
Opportunity Cost vs Trade Off
The main difference between opportunity cost and trade-off is that opportunity cost is the cost of choosing a particular action and letting go of other opportunities whereas for a trade-off it is the act of giving up on a particular option to choose for another potential or non-potential choice.
Comparison Table Between Opportunity Cost and Trade Off
|Parameter of comparison||Opportunity Cost||Trade Off|
|Meaning||The cost of choosing a particular option in return of letting go of next best potential opportunity||The action of giving up on a particular option trade off chose for another option|
|Choices made||Usually one opts for better preference||The process is entirely under in the action of prioritizing what an individual want|
|Risk Taken||Losses experienced are not accounted||No direct link trade off what one has sacrificed for|
|Privileges||Better choices are made hence at a privilege.||The price of other possessions are at cost|
|Profit/Loss||Links trade off the gain that was lost but could have been avoided due trade off wrong decision making||Does not calculate the profit or loss but linked with factors such as choice of time|
|Calculation||Calculated by subtracting the value of the preferred option from the value of the most worthwhile choice||Cannot be calculated|
What is Opportunity Cost?
Opportunity cost denotes the potential benefit an individual loses in the process of choosing one alternative over another. Opportunity cost formulates the benefits that could have been gained if the other potential choice opted. Opportunity cost can be often seen if an individual is not careful. Better decision-making skills are formed eventually in the process of understanding the potential of missed opportunities.
In business, resources can be often limited or within restricted boundaries. Choices have to be made, under such circumstances one course of action has to be chosen over others. Opportunity cost measures those costs of choices that have been already made. If one wants to calculate opportunity cost it can be calculated by adding up the cost of the nest best potential choice. It requires viewing decisions in the way one might not have considered.
What is Trade Off?
Trade off are the choices which we let go to receive a particular choice (product, service) that we desire. It is a negotiation that arises, where to obtain a specific service one has to give up on others. Trade off is separating the forgone alternative.
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.
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.