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Opportunity Costs and Trade-offs in Economic Theory | #economics

The concepts 'opportunity cost' and 'trade-off' are some of the most important economic terms. Very generally, we can say that economics is the study of various trade-offs and opportunity costs, for economics that we are dealing with is scarcity economics. The economic theory developed until nowadays illustrates the existence of scarcity economics through the existence of the opportunity cost and trade-offs in economics. More precisely, the economic system that we study is the one where all resources are limited and one needs to meet a decision when choosing, for instance, between two things. Once taken, the decision rules out the alternative choice. It is that choice which is regarded as the opportunity cost in economics. 

Economic Terms and Economic Theory | Trade-off and opportunity cost within a given economic system (of scarcity economics)
Economic Terms | Trade-off vs. Opportunity Cost in economic theory: 'You cannot have your cake and eat it.'

Economic Terms | Opportunity Cost vs. Trade-off



Opportunity Cost in Economics

Opportunity cost definition


One of the main ideas in economics is the scarcity of resources (provided we are handling 'scarcity economics' and not the fantasy one), so one of its main tasks is to find the best and most efficient (see the definition of Pareto efficiency) way to allocate available resources. That implies that the resources that we possess are limited and economics itself is the study of such an economic system where we are always confronted with the idea that we should find the most efficient combination of resources, that is to say such a combination that will allow us to fulfil our needs as soon as possible and with the least difficulty.

The existence of such an economic system implies that having limited resources and wanting to consume a certain product, we need to sacrifice something else (e.g. leisure time or another resources) for that. That brings us to one of the crucial economic terms - opportunity costs.


Opportunity cost example


Let's say we want to consume a product that needs to be bought. In order to buy it, we need to work first. Working for a month brings us a limited income. As a result, we are confronted with a choice (and, consequently, an opportunity cost resulting from it) of what to consume. Should we consume the product, we need to refuse from something else. An illustration of such an opportunity cost in economics would be - working less and gaining more leisure time. More precisely, the opportunity cost arising within the given economic system is as follows: how much that product would cost in terms of leisure time or just working fewer hours?


Trade-offs in economics 


Trade-off definition


The economic theory of scarcity economics has produced another notion which is close to that of the opportunity cost. More precisely, it defines the alternative producing the opportunity cost in economics. The term trade-off refers namely to the most preferred alternative (not its price) which has been sacrificed for the sake of the chosen opportunity within the given economic system.


Trade-off example


Having some limited resources and needing to take a decision as to whether we choose to consume more of the product or work less (=have more of leisure time), we make a particular choice. If we choose to consume more of the product, the opportunity of working fewer hours has to be given up. More hours of leisure are, therefore, an instance of the opportunity cost. The trade-off would be, what we have to give up, i.e. some extra leisure hours, for money has to be earned (and time is spent for that) so that the product might become affordable.


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