What is trade off and opportunity cost


We seldom make all-or-nothing decisions; everyday life is an exercise in marginal decision-making. Decisions to continue or discontinue an activity are made by weighing the additional expected benefits against the additional expected costs.

The PPF Production Possibility Frontier models the trade-offs and opportunity costs that necessarily accompany decision-making in the face of scarcity. Scarcity is more of a problem for the poor. People face scarcity; governments do not. Producers make choices differently than consumers. We can have more without giving up anything. Good decision-making means being able to distinguish between good and bad alternatives.

Sometimes, you just have no choice. Once a choice is made people must stick to it. The value of an education is an exclusive personal benefit. Economic choice making principles work better for western societies. How can something be scarce and not in short supply at the same time? How can it be that rich people face as much scarcity as poor people do?

Does finding more productive resources make things less scarce? Why, in economic terms, is the price of a good or service different than its cost? How can you give up something you never had in the first place? Is the production possibility curve ever a straight line? Classroom Activity Options Distribute and discuss the article entitled Scarcity. Bring in an item to use for the simulation — a large cinnamon roll for a morning class, or a gourmet chocolate bar for an afternoon class — something you know many students will want.

Give them 5 minutes to work in groups of 2 or 3 to brainstorm and list as many ways to distribute the item as possible. Re-convene the large group and, in round-robin fashion, list distribution methods on the overhead or whiteboard, until no new ways are proposed. Do not allow discussion during this time, only the listing of the distribution types. Group the list items into standard categories of allocation systems: Once this exercise is completed, tell students they now have the knowledge they need to make an informed decision and that they will get one vote each to determine how the item will be distributed.

Distribute the item as selected by the class. Then, tell the class that what they just did is reflective of economies throughout the world. Assign the students with the task of identifying the cost to them of each of the following choices: For each choice, identify the next-best alternative. First choice of the morning: Get up when the alarm goes off. Turn off the alarm and go back to sleep.

Second choice of the morning: Go back to bed. Emphasize that the value of the next-best alternative is the opportunity cost of each decision. Ask students if they will stay in school until graduation.

Ask them what could make them change their minds — either from yes to no, or from no to yes. Emphasize that deciding whether or not to keep coming to school is a marginal decision. Each day, students weight the expected additional costs and expected additional benefits of going to school again, and if those expected additional costs or benefits change, then their decision about staying in school until graduation may change.

Display the big pencil and discuss all of the choices that must be made and by whom in order to produce it. Identify the productive resource categories and why these are scarce. Introduce the incentives that cause the pencil to be produced. Obtain a two pan balance and use this prop to visually reinforce the decision-making process of weighing expected costs with expected benefits. Distribute practice PPF problems for students to work on individually or in small groups.

Ask students to generate original PPF examples demonstrating trade-offs and opportunity costs from their own lives. Ask students to discuss the question of how an understanding of opportunity cost could change their own lives. The Tampa Tribune, April 7, Most economic concepts are repetitive and used in a variety of application as we build the economic way of thinking Know the key concepts very well! Ask and answer the rhetorical question: What is your opportunity cost for being here for the next hour?

How do economists use the concept of opportunity cost to explain a person making a mistake? The choice of waste receptacle is a trade-off between the frequency of needing to take the trash out for the Dumpster versus the ease and safety of use.

In the case of food waste, a second trade-off presents itself as large trash cans are more likely to sit for a long time in the kitchen, leading to higher levels of decomposing food indoors and a potential pest attraction. With a small trash can, the can will be taken out to the Dumpster more often, thus eliminating the persist rot that attracts pests.

Of course, a user of a large trashcan could carry the can outside frequently anyway, but the heavier can would weigh more and the user would have to think more about when to take the can out, or confine themselves to a schedule, compared to a smaller can which is evidently full when it takes taking out. In cold climates, mittens in which all the fingers are in the same compartment serve well to keep the hands warm, but this arrangement also confines finger movement and prevents the full range of hand function; gloves, with their separate fingers, do not have this drawback, but they do not keep the fingers as warm as mittens do.

As such, with mittens and gloves, warmth versus dexterity is the trade-off. In a like fashion, warm coats are often bulky and hence they impede freedom of movement for the wearer. Thin coats, such as those worn by winter sports athletes, give the wearer more freedom of movement, but they are not as warm.

When copying music from compact discs to a computer, lossy compression formats, such as MP3 , are used routinely to save hard disk space, but information is "thrown away" to the detriment of sound quality. Lossless compression schemes, such as FLAC or ALAC take much more disc space, but do not affect the sound quality as much, thus providing better sound. Large cars can carry many people five or more , and since they have larger crumple zones, they may be safer in an accident.

However they also tend to be heavy and often not very aerodynamic and hence have relatively poor fuel economy. Small cars like the Smart Car can only carry two people, and their light weight means they are very fuel efficient. At the same time, the smaller size and weight of small cars means that they have smaller crumple zones, which means occupants are less protected in case of an accident. In addition, if a small car has an accident with a larger, heavier car, the occupants of the smaller car will fare more poorly.

Thus car size large versus small involves multiple tradeoffs regarding passenger capacity, accident safety and fuel economy. In athletics, sprint running demands different physical attributes from running a marathon. As such, the two contests have distinct events in competitions such as the Olympics , and each pursuit features distinct teams of athletes.

Whether a professional runner is better suited to marathon running versus sprinting is a trade-off based on the runner's morphology and physiology e.

This tradeoff is chiefly from the perspective of a sport's recruiter, who decides what role a prospective athlete would best suit on a team. In economics a trade-off is expressed in terms of the opportunity cost of a particular choice, which is the loss of the most preferred alternative given up. A tradeoff, then, involves a sacrifice that must be made to obtain a certain product, service or experience, rather than others that could be made or obtained using the same required resources.

For example, for a person going to a basketball game, their opportunity cost is the loss of the alternative of watching a particular television program at home. Many factors affect the tradeoff environment within a particular country, including availability of raw materials, a skilled labor force, machinery for producing a product, technology and capital, market rate to produce that product on reasonable time scale, and so forth.

A trade-off in economics is often illustrated graphically by a Pareto frontier named after the economist Vilfredo Pareto , which shows the greatest or least amount of one thing that can be attained for each of various given amounts of the other. As an example, in production theory the trade-off between output of one good and output of another is illustrated graphically by the production possibilities frontier. The Pareto frontier is also used in multi-objective optimization.

In finance , the capital asset pricing model includes an efficient frontier that shows the highest level of expected return that any portfolio could have given any particular level of risk, as measured by the variance of portfolio return.

In biology and microbiology , tradeoffs occur when a beneficial change in one trait is linked to a detrimental change in another trait. Tradeoffs are important in engineering. Similarly, tradeoffs are used to maximise power efficiency in medical devices whilst guaranteeing the required measurement quality [7].

In demography , tradeoff examples may include maturity, fecundity , parental care, parity , senescence , and mate choice. For example, the higher the fecundity number of offspring , the lower the parental care that each offspring will receive.