1.5.5

• Opportunity cost


  The cost of foregoing the next best alternative
• Trade-off


  A compromise
• Land, labour, capital and enterprise are limited resources but our wants are unlimited, causing scarcity
• When making important decisions in business, the cost of not selecting an alternative is an opportunity cost
• To achieve two things may not be possible, as there is only so much capital and only so much of other resources
• In business, a compromise must be made and this is called a trade-off
• Scarves trade-off

  • Import tariffs too high for Ethiopian scarves, so cheaper European supplier used but lower quality
• Cars vs vans trade-off

  • To increase car production, resources must be shifted away from van production, and vice versa
• Trade-offs are mostly short-term
• Opportunity cost is the loss of other alternatives when something else is chosen
• Trade-off is another word for a compromise
• Opportunity cost is the forgone benefit that would have been had from the option not chosen
• Trade-off means that you have to sacrifice some of A to get more of B