Skip to main content

Understanding Trade-Offs in Economics: Balancing Choices for Optimal Outcomes

 TRADE-OFFS 

Economics is concerned with people making decisions. However, these decisions are not always easy to make as making a decision involves making a choice. This choice may be between different alternatives/goals/options. Generally, choosing one goal means not being able to choose the other one. This results in what we call a trade-off where in order to choose one thing we have to let go or sacrifice the other one.



Examples of Trade-Offs: 

People face numerous trade-offs in their daily lives. Let’s say a person wants to reach his office. He may either go by car or bicycle. Going by a bicycle is not only environmentally friendly but also is a good exercise. However, going by a car will save time and make him reach faster. This is a situation of trade-off where the person has to choose an option and in choosing one, he will be giving up the other one.

A family which has a limited monthly budget has to decide whether to spend that money on a vacation, saving for their children’s future or buying a utility good such as a SUV car, T.V etc. Spending more on the vacation means less money is available for other purposes. Therefore, due to the limited budget, the family has to make a decision of trading-off one goal for the other (or spending more on one goal and less on the other)

A student faces a trade-off when deciding which subject or group of subjects to choose for higher education. As, he/she cannot choose all the subjects, he/she has to make a choice of choosing one (or a group) and leaving the rest.

Trade-Off faced by students
Let us assume a farmer with a piece of land. Now, the land can be used for various purposes. It can be used to grow crops or the farmer can sell it. Thus, there exists a trade-off between keeping the land and selling it off. Again, the farmer may have two options, the land can either be sold to the Government which can then use it for a housing project, or sell to a private party which may make a farmhouse on that land.  If the farmer chooses to keep his land and grow crops, he again faces a trade-off. Let’s say the farmer can grow two crops, wheat and rice on that land. Now, when the farmer increases the area of land under wheat production, he has less land left for producing rice. So, there is a trade-off between production of wheat vs production of rice.

Not only individuals, but nations also face trade-offs. A country when increasing the money supply may have to face a rise in the general price level in the economy. Thus, the country faces a trade-off between increase in money supply and lower prices.

Why do trade-offs arise?

Trade-offs arise because of scarcity of resources. As resources are scarce or limited, people cannot have everything they want at a given time. So, they have to choose one option over the other. In case of our examples discussed in the above paragraph, the family has a limited income at a given time and has to decide in which way to spend that income, for a student, time is scarce resource, the farmer has a limited piece of land which ultimately can be used for only one purpose.

Given that trade-offs exist, how to people then decide what to choose between different alternatives?

The final decision that people make depends on their preferences and opportunity cost.

Key Points

  • In Economics, decision making involves making a choice between different goals. Choosing one goal means not being able to choose the other one which results in a trade-off between the goals. 
  • In a trade-off, in order to choose one goal we have to let go or sacrifice the other one.
  • Trade-offs arise because of scarcity of resources. As resources are scarce or limited, people cannot have everything they want at a given time.
  • Which goal a person will ultimately choose depends upon his/her preferences and opportunity cost.

Popular Posts

Consumer's Equilibrium using Marginal Utility Analysis

The Law of Diminishing Marginal Utility It has been observed that the desire to consume a commodity decreases as more and more units of that commodity are consumed. Therefore, every successive unit of the commodity consumed provides lesser utility than before. The Law of Diminishing Marginal Utility states that as more and more units of a commodity are consumed, the Marginal Utility derived from every successive unit of the commodity declines.  This happens because psychologically, as a consumer starts to consume one unit of the good after another, the the consumers satisfaction reaches a saturation point. So, with every successive unit consumed, the additional utility the consumer derives goes on declining.  Consumer's Equilibrium using Marginal Utility: Cardinal Analysis Consumer's equilibrium is that level of consumption at which the consumer is getting maximum satisfaction (benefit) while spending out of his given income across different goods and services, and has no tende

Measures of Dispersion

The measures of central tendency do not always show the real picture. Take for example, the following numbers 35, 35, 35, 35, 35 and  20, 25, 30,45, 55  The mean of both the series is 35. That is 35 is representative of both the series. However, there is variability in data. In the first series, all the values are equal to 35, in the second one, they vary and none of the values is 35. So, we say that dispersion or variability exists. We can find this dispersion amongst the values and between the values and the mean. The methods to find them are the measures of dispersion. They are  1. Range 2. Quartile Deviation 3. Mean Deviation 4. Standard Deviation 5. Lorenz Curve