Business

Difference between trade-off and opportunity cost

Key difference

The difference between ‘compensation’ and ‘opportunity cost’ is that ‘compensation’ is sacrificing one of the two options you had to get what you want, it can be money, property or any of your belongings. that one gives up for something more important. Whereas, opportunity cost is the cost of missed opportunity and a way to overcome losses.

Compensation versus opportunity cost

Compensation and opportunity cost are very common and related terms in economics. But they are quite different terms. Exchange is basically defined as giving up or sacrificing one of your belongings to get what you really want. It always shows an indirect relationship with the thing sacrificed or chosen over the choice. For example, in ancient times, the term compensation was quite common. How people used to trade what they had, for what they wanted. This is an indirect relationship between the choice you made and the membership you have. But when it comes to opportunity cost, opportunity cost is basically the cost you have chosen as an alternative to cover the loss you suffered by choosing one of the two. options or alternatives.

Comparison chart

Base Compensation Opportunity cost
Definition It is a situation in which belonging is compromised in order to achieve something else. The opportunity cost is choosing one of the two options and losing the benefits provided by the alternative opportunity.
basic difference In the process of selecting what you want, membership is completely sacrificed. Find a better alternative.
Benefit It favors getting what is really in demand, but at the cost of everything else, you have. Although an alternative was still missed, he chose a better alternative and is therefore more beneficial.
Relationship to other options It’s indirectly related to what you sacrificed, since an increase in the choice demand you made would leave a constant decrease to the one you sacrificed. Although it is also indirectly related to another alternative, losses are not considered as you move on to a better alternative that satisfies the missed opportunity.
Calculation There is no such formula for calculating trade-ff. Opportunity cost = return of the most beneficial option: return of the chosen option.

What is a compensation?

Compensation can be defined as the selection of one of two things. This automatically leads to sacrificing the other. Let’s see an example in our daily life, if we are going to buy a skateboard and a carom set at the same time, but when it comes to our wallet, we come to know that we cannot afford both at the same time. So we sacrifice one of two things. Obviously, we would choose what we needed or liked better, over what we wanted to have, but it was not as essential as what was chosen. Compensation is a typical economic term that simply shows the importance of one thing over another and the loss is calculated or determined which one was done to obtain the desire.

What is the opportunity cost?

Opportunity cost is the loss you could have saved by making another choice, but you didn’t completely give up what you needed. Compensation usually leads to options and that leads to opportunity cost. For example, he chose carom on the skating board. When he left the store and he saw another store that was offering a discount or an offer that could have made him buy both options. But at the same time, he made a decision, and he has one of two things, but by selecting the store wisely, he could have given her the opportunity to use her money more wisely. Opportunity cost is usually calculated using the following formula: opportunity cost = return on the most profitable option – return on the chosen option

Key differences

  1. Compensation is the selection of one of the two given available options and leads to the sacrifice of an option or membership in terms of quality, quantity or property. While trade-off leads to opportunity cost, selecting the wrong option can lead to the loss of the more beneficial option that was ignored.
  2. Compensation does not count loss or gain, but is a selection based on time, choice or any other reason of the person. Whereas, when it comes to opportunity cost, the term directly relates to the benefit that could have been gained but lost due to a wrong choice.
  3. Opportunity cost is the cost that could have been a gain if the choice were to opt in enthusiastically, but means no loss, while trade-off means losing one thing to gain another.

Final Thought

After analyzing your compensation, you could know the cost of what you have given up and what you have earned. If the thing or cost you have given up is less than the one you selected, you have no loss, therefore no opportunity cost. If you give up an option, you do not prefer to select the cost rather than your selection; is definitely lost, and this would be defined as opportunity cost.

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