Life is all about decisions, since we have limited time and resources. This leads us to make trade offs. In a nutshell, trade offs are the decision making process to choose between alternatives.
We, hopefully, want what is best for ourselves. But when faced with, say, going to the market versus ordering from a delivery app – we must ask ourselves for the positives and negatives that are required to make that decision. While going to the market is probably cheaper in the long run, it takes more time. Delivery app is convenient, but let’s be real – it adds up. That is its trade off. The importance of trade offs is that it is how we choose the best alternative among all the options.
Since these choices we make on a daily basis come with a price, we call that the opportunity cost. Here’s the equation, and I’ll make it make sense. The Opportunity Cost is FO (the return on the not chosen option), minus the CO (the return on the chosen option).
Back to our dilemma – since I’m broke, let’s head to the market and calculate the cost. Delivery would have cost $25, while the market only cost $18. Therefore we subtract the market cost from the delivery cost, leaving us with $7, the value of the alternative. This opportunity cost is the loss we take to make a gain, and it helps us make informed decisions from anything like ordering food to buying stocks.
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