Difference Between Opportunity Cost and Trade Off

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.

Opportunity cost vs Trade off

 

Comparison Table Between Opportunity Cost and Trade Off

Parameter of comparisonOpportunity CostTrade Off
MeaningThe cost of choosing a particular option in return of letting go of next best potential opportunityThe action of giving up on a particular option trade off chose for another option
Choices madeUsually one opts for better preferenceThe process is entirely under in the action of prioritizing what an individual want
Risk TakenLosses experienced are not accountedNo direct link trade off what one has sacrificed for
PrivilegesBetter choices are made hence at a privilege.The price of other possessions are at cost
Profit/LossLinks trade off the gain that was lost but could have been avoided due trade off wrong decision makingDoes not calculate the profit or loss but linked with factors such as choice of time
CalculationCalculated by subtracting the value of the preferred option from the value of the most worthwhile choiceCannot 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.

opportunity cost
 

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.

trade off

Main Differences Between Opportunity Cost and Trade Off

  1. 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
  2. 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.
  3. 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.
  4.   In opportunity cos, the preference of better choices is made wherein trade off the price of other possessions are at cost.
  5. Opportunity cost refers to the profit that has already been lost on the other hand trade off does not with profit or loss.
  6. 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

  1. https://dl.acm.org/doi/abs/10.1145/1138929.1138946
  2. https://www.jneurosci.org/content/36/37/9516
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