Trade-Offs in Economics: Definition & Examples

Trade-Offs in Economics: Definition & Examples
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Learn about trade-offs in economics and why they are important to understand when making good decisions about your time, money and energy. Read about some trade-offs that you make every day, whether you realize it or not.

Definition of Trade-Offs in Economics

Have you ever had to make a decision about spending your money today versus tomorrow? For example, you might ask yourself, 'Should I go out to dinner tonight, or would I rather save my money so I can go to the movies tomorrow?' You probably make decisions like this several times a day without even realizing it. Since your resources - such as time and money - are limited, you must choose how to best allocate them by making some trade-offs. Let's learn a little more about trade-offs and why understanding this concept will help you make better decisions about your time and money.

Most of us don't have so much money that we are in a position to buy everything we desire. We must put thought into every purchase and how it affects our bank account. We also must think about what type of satisfaction that purchase will give us. As a result, to get one thing that we like, we usually have to give up another thing that we also may like. Making decisions requires trading off one item against another.

In economics, the term trade-off is often expressed as an opportunity cost, which is the most preferred possible alternative. A trade-off involves a sacrifice that must be made to get a certain product or experience. A person gives up the opportunity to buy 'good B,' because they want to buy 'good A' instead. For a person going to a baseball game, their economic trade-off is the money and time spent at the ballpark, as compared to the alternative of watching the game at home and saving their money, plus the time spent driving to the ball game.

Every Choice Has a Trade-Off
Trade-off choices

Trade-Off Examples

Going out on Friday night could involve several economic trade-offs. Let's say you really want to go to the bar with your friends. You will likely spend $40 that evening and get home at 1 AM. The first trade-off might be the four hours you are giving up that you could use to perhaps finish your term paper. Another potential trade-off might be the $40 that you need to fill up your car with gas. Finally, you know that you might wake up with a headache and most likely will miss your Saturday morning workout that you look forward to. Who would have thought you were giving up so much to go out for a few hours? The conclusion isn't that you should skip going out with your friends, but rather that you should evaluate the other alternatives, so you can make the smartest decision possible for you.

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