Opportunity Cost and Trade-off

Opportunity Cost and Trade-off

Think about one choice you made in the past several days and explain how this could be analyzed using economics concepts such as trade-offs, opportunity costs, and marginal analysis

During the summer break, I was lucky to get a job at a neighboring company. The company was not paying well and at the end of the month, I had to decide on how I will spend my salary. It is hard to make the decision because of the different needs I was to consider. I had to decide on whether to use the money to buy clothing, pay college education, or go for a vacation. An individual faces a trade-off when he/she has to give up some benefits to gain others (Mankiw, 2014). For this case, if I chose to spend an extra dollar for the college education, I will have one less dollar to spend on clothing and vacation. The opportunity cost is what a person gives up to get an item (Mankiw, 2014). If my first choice was to spend the money on college education, then the opportunity cost is to buy clothing and go for vacation. The marginal analysis determined that if I spent the money on clothing and vacation, I would not have enough money to pay my college fees. Therefore, it was worth to spend the money on college education.

How does the concept of “trade-off” relate to “opportunity costs?” 

The concept of trade-off entails giving up on something to get something else whereas the opportunity cost of an item is what an individual gives up to get that item. Since individuals face trade-offs, the decisions they make will require them to compare the costs and benefits of alternative courses of action. Whenever an individual makes a trade-off, the item you do not choose is your opportunity cost (Hubbard, Garnett & Lewis, 2012). Therefore, the best alternative activity would be the opportunity cost.


What is the difference between monetary and non-monetary opportunity costs?

Monetary opportunity cost refers to the dollar amount that a person pays to get an item. For instance, a wage a person gives up if he/she decides to attend lessons instead of working. On the other hand, non-monetary opportunity cost does not exhibit dollar value (Hubbard, Garnett & Lewis, 2012). For instance, if the opportunity cost of a student attending lectures is foregone time with his/her pet.

Why are opportunity costs based on a person’s tastes and preferences?

The opportunity cost is based on tastes and preferences of a person because before a person makes a decision, he/she will have to consider a particular cost that would result from the decision made. People have different preferences, and each person will have to think about his/her choice and consider the benefits he/she might get (Hubbard, Garnett & Lewis, 2012). For instance, I might prefer to spend less time with my family to work extra time and earn more income. Other people might think differently.



Hubbard, G., Garnett, A., & Lewis, P. (2012). Essentials of economics. Pearson Higher Education AU.

Mankiw, N. G. (2014). Principles of macroeconomics. Stamford, CT: Cengage Learning.



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