Difference Between Opportunity Cost and Trade off
Trade off and opportunity cost, are very old concepts that are known to man since ages. In the beginning of civilization, when the currency system did not exist people depended on trade off, which was in fact a kind of modern commerce. In communities which are self sufficient some people had a set of special capabilities while others had some other. They provided services to one another and were thus engaged in a trade by giving their services to other people and in turn receiving services from them. The similar concept occurs in case of trade between countries nowadays. If a country produces a particular item at cheaper prices (for whatever reason), other countries, rather than the producing the item itself at higher prices, tend to buy it from this country who is selling the item at cheaper price. Trade offs often pave way to opportunity cost. Let us see the difference between these two terms.
Trading is often defined as the act of leaving something to gain some other thing. If you want to watch a live telecast of an important incident, you have to sacrifice the daily soap which is your favorite or rather trade off your favorite Television show. In everyday life there are many examples that shows trade-offs. If you want to get selected in the rugby team of your school, you will have less time to devote for you studies and as a result your grades will suffer. But despite the fact, you are willing to trade off your grades with a place in the rugby team.
The opportunity cost is the highest value of something that we are willing to lose to win something we value more. If there is an executive working in a company of $ 40,000 a year, and he has enrolled himself in a MBA school paying $ 50,000 a year, the opportunity cost is calculated as a sum of incurred cost is $ 90,000 as he must give up his job to receive an MBA degree. There are many applications of opportunity cost in a wide range of industries. It is this opportunity cost that forces a manufacturer to let go of his popular product and go to another product which, according to him is more profitable. The opportunity cost is calculated in conditions such as the analysis of comparative advantage, consumer choices, time management, career choices, capital cost and production possibilities.