L6: Trade offs and cost benefit analysis Flashcards
Why are trade-offs necessary
They are necessary due to our limited resources, choice must be made
Def: Trade Off
Forging the opportunity to gain something of value with our time or money once we use our time or spend money on some other activity ( good or service )
Def: opportunity cost
Is the value of the next best opportunity forgone when a decision is made
The difference between T.O and O.C
-Trade-offs refer to the range of benefits that could have been gained whereas O.C is just the next best option
- O.C. is what is forgone whereas T.O if the flow on effect of what we have missed out on
-T.O are more indirect
O.C more direct in nature
READ MEH
When a decision is made, all things forgone are a trade-off but the most difficult to let go was the opportunity cost
MICROECONOMIC TRADE OFFS
- the trade-off between spending and saving
- trade-off between work and leisure
-Producing one product compared to other options
MACROECONOMIC TRADE OFFS
-Trade-off between economic growth and the environment
-Trade-off between efficiency and equity
Short term vs long-term T.O
When we make a choice to consume today, we are making a trade-off bing able to consume in the future, which leads to lower living standards in the future
Short Term Trade-off
Refers to a period of time that is close enough to heavy influence decision making today
Long term Trade-off
Far enough to have a smaller influence on today’s decision making
Cost-benefit analysis
A comparison of the expected costs and benefits of a particular course of action or project
Why a Cost-benefit ratio analysis
-help take some of the subjectiveness out of decisions
-Great level of clarity
-Helps determine the best trade-offs to make
BCR =
BCR = Value of +/Valie of -
