Difference Between Opportunity Cost and Trade Off

Opportunity Cost vs Trade Off

Trade off and opportunity cost are very old concepts that man has known since ages. In ancient times when currency system was not in existence, people depended upon bartering that was in effect a type of modern trade off. In a self sufficient community some people had one set of skills while others had other skills. They provided services to each other and thus engaged in a trade off by giving up one’s service to receive another service. The similar concept takes place in the case of trade between countries now a days. If there is a country that produces a commodity at cheap prices (for whatever reason), other countries, instead f producing that commodity at higher prices tend to buy it from that country selling it what that country is deficient in. Trade offs often result in an opportunity cost. Let us see the difference between these two terms.

Trade off is often described as sacrificing something to gain something. If you are watching an important live telecast, you have to miss your regular favorite program which means that you are trading off your favorite program for this important telecast. In daily life there are countless such examples that demonstrate trade offs. If you want selection in the school rugby team you have lesser time to pay for your studies with the result that your grades suffer. But despite the fact that you know why it is happening, you are willing to trade off your grades with a place in the rugby team.

Opportunity cost is the highest value of something that we are prepared to lose to gain something that we value more. If there is an executive working in a company at $40000 per annum but he enrolls in an MBA school paying $50000 per annum, his opportunity cost is calculated as a sum of the two costs incurred which is $90000 as he has to forego his job to get an MBA degree. There are many applications of opportunity cost in a wide range of industries. It is opportunity cost that makes a manufacturer give up on his popular product and go for another product that he deems as more profitable. Opportunity cost is calculated in many situations such as analysis of comparative advantage, consumer choice, time management, career choice, cost of capital, and production possibilities.

In brief:

Opportunity Cost vs Trade Off

• Trade off and opportunity cost are two concepts that are made use of in many situations in life.

• Though similar in meaning, trade off is sacrificing one thing to get another while opportunity cost is the cost incurred by losing out on one thing to get another.