Theme 1 - 1.5.5 - Business Choices Flashcards
What is Opportunity cost ?
Opportunity cost can be measured as the cost of foregoing the next best alternative
In other words, if there is another alternative, then if this is not chosen - this is also a cost to the business - an opportunity cost
It is a cost that happens when a business for e.g. wants to switch from a LTD to PLC then if it doesn’t switch to a PLC then it looses out on the benefits of a PLC and if it does choose to switch to PLC then it looses the benefits for LTD
What is a trade-off ?
A trade-off is when less of one is exchanged for more of another. It is known as a compromise so for example a business may want to undertake a new option but they might not go all the way with this new option - they might still stick with the first option just a bit to gain some little advantages of it
IT may mean that a business has to complete less of one thing e,g, marketing in order to do more of something else e.g. new machinery production
When there are choices - a compromise that’s to be made and in business they call this a trade off
Give some more examples of trade-offs ?
Imagine you want to start a shop selling beautiful scarves imported from Ethiopia - made by disabled workers - but then the import tariffs into the UK are too high - this would increase your costs and push up the prices for silk scarves
However, you have found an alternative supplier in Europe the prices are cheaper and you will make more profit but the quality is not as good as the Ethiopian scarves
What will you do ?
What choice do you make ?
Is there a possibility to make a trade off
Give another example of trade-off
One factory can product either cars or vans, or some of each with the limited resources available to it
TO increase car production, resources must be shifted away from van production, and vice versa
Trade-off could be that they could shift a bit of resources to van production but keep most resources to make cars
