What is a trade-off?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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In economics, the term “trade-off” is usually associated with the term “opportunity cost.”  Opportunity cost is what you give up in order to do some particular thing.

The basic fact of economics is that resources are limited and human wants are unlimited.  What this means is that we can never have everything we want.  Whenever we do one thing, we have to give up something else.  For example, let us say that I want to spend $15 on some singer’s new CD.  In order to do that, I have to give up the chance to do something else with that $15.  Perhaps I would have liked to get myself a really big pizza with lots of toppings.  That is my opportunity cost for buying the CD.

Looking at that definition of opportunity cost, you can see why it makes sense to call these “trade-offs.”  I got the CD, but I had to trade the chance to get the pizza.  Thus, a trade-off is a term that is sometimes used interchangeably with the term “opportunity cost.”

chrisyhsun's profile pic

chrisyhsun | Student, College Freshman | (Level 1) Salutatorian

Posted on

In economics (as well as everyday language, to some extent), a trade-off occurs when something must be given up for another thing. In economics, this specifically applies to the trade-off that occurs because of limited resources. When resources are limited, it is impossible to use them in every way desired, so people must make decisions and trade-offs as to where the limited resources will go. One very relatable example of this is a student’s time. Time is a limited resource (sadly, there are only 24 hours in a day), and besides the basics of sleeping, eating, and showering, students are left to allocate their (very) limited resource to different things. Sleeping in an extra hour would mean missing an 8am class. Studying another hour for that midterm tomorrow means missing a friend’s birthday dinner. Both of these are examples of trade-offs, because the student must give something up for another due to his or her limited resource of time.

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