Opportunity cost and Trade off both are terms we come across when we have decisions to make in the financial arena of our business.
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.
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.
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 generates opportunity costs. Whenever a trade off is made, the choice that is not opted for is opportunity cost.
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.
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.
References
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