In microeconomic theory, the opportunity cost, or alternative cost, of making a particular choice is the value of the most valuable choice out of those that were not taken. In other words, opportunity that will require sacrifices.
When an option is chosen from two mutually exclusive alternatives, the opportunity cost is the "cost" incurred by not enjoying the benefit associated with the alternative choice. The New Oxford American Dictionary defines it as "the loss of potential gain from other alternatives when one alternative is chosen". Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice". The notion of opportunity cost plays a crucial part in attempts to ensure that scarce resources are used efficiently. Opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered an opportunity cost.
Opportunity cost of a product or service means the revenue that could be earned by its alternative use. In other words opportunity cost is the cost of the next best alternative of a product or service. The meaning of the concept of opportunity cost can be explained with the help of following examples:
(1) The opportunity cost of the funds tied up in the one's own business is the interest (or profits corrected for differences in risk) that could be earned on those funds in other ventures.
(2) The opportunity cost of the time one puts into his own business is the salary he could earn in other occupations (with a correction for the relative psychic income in the two occupations).
(3) The opportunity cost of using a machine to produce one product is the earnings that would be possible from other products.
(4) The opportunity cost of using a machine that is useless for any other purpose is nil, since its use requires no sacrifice of other opportunities.
Thus opportunity cost requires sacrifices. If there is no sacrifice involved in a decision, there will be no opportunity cost. In this regard the opportunity costs not involving cash flows are not recorded in the books of accounts, but they are important considerations in business decisions.
The term was first used in 1894 by David L. Green in an article in the Quarterly Journal of Economics entitled "Pain Cost and Opportunity-Cost. The idea had been anticipated by previous writers including Benjamin Franklin and Frédéric Bastiat. Franklin coined the phrase "Time is Money", and spelt out the associated opportunity cost reasoning in his “Advice to a Young Tradesman” (1748): “Remember that Time is Money. He that can earn Ten Shillings a Day by his Labour, and goes abroad, or sits idle one half of that Day, tho’ he spends but Sixpence during his Diversion or Idleness, ought not to reckon That the only Expence; he has really spent or rather thrown away Five Shillings besides.”
Bastiat's 1848 essay "What Is Seen and What Is Not Seen" used opportunity cost reasoning in his critique of the broken window fallacy, and of what he saw as spurious arguments for public expenditure.
Explicit costs are opportunity costs that involve direct monetary payment by producers. The explicit opportunity cost of the factors of production not already owned by a producer is the price that the producer has to pay for them. For instance, if a firm spends $100 on electrical power consumed, its explicit opportunity cost is $100. This cash expenditure represents a lost opportunity to purchase something else with the $100.
Implicit costs (also called implied, imputed or notional costs) are the opportunity costs that are not reflected in cash outflow but are implied by the choice of the firm not to allocate its existing (owned) resources, or factors of production, to the best alternative use. For example: a manufacturer has previously purchased 1000 tons of steel and the machinery to produce a widget. The implicit part of the opportunity cost of producing the widget is the revenue lost by not selling the steel and not renting out the machinery instead of using it for production.
One example of opportunity cost is in the evaluation of "foreign" (to the US) buyers and their allocation of cash assets in real estate or other types of investment vehicles. During the downturn in circa June or July 2015 of the Chinese stock market, more and more Chinese investors from Hong Kong and Taiwan turned to the United States as an alternative vessel for their investment dollars; the opportunity cost of leaving their money in the Chinese stock market or Chinese real estate market is the yield available in the US real estate market.
Opportunity cost is not the sum of the available alternatives when those alternatives are, in turn, mutually exclusive to each other. It is the highest value option forgone. The opportunity cost of a city's decision to build the hospital on its vacant land is the loss of net income from using the land for a sporting center, or the loss of net income from using the land for a parking lot, or the money the city could have made by selling the land, whichever is greatest. Use for any one of those purposes precludes all the others.
If someone loses the opportunity to earn money, that is part of the opportunity cost. If someone chooses to spend money, that money could be used to purchase other goods and services so the spent money is part of the opportunity cost as well. Add the value of the next best alternative and you have the total opportunity cost. If you miss work to go to a concert, your opportunity cost is the money you would have earned if you had gone to work plus the cost of the concert.
The Austrian School is a heterodox school of economic thought that is based on methodological individualism—the concept that social phenomena result exclusively from the motivations and actions of individuals.The Austrian School originated in late-19th and early-20th century Vienna with the work of Carl Menger, Eugen Böhm von Bawerk, Friedrich von Wieser and others. It was methodologically opposed to the Prussian Historical School (in a dispute known as Methodenstreit). Current-day economists working in this tradition are located in many different countries, but their work is still referred to as Austrian economics. Among the theoretical contributions of the early years of the Austrian School are the subjective theory of value, marginalism in price theory and the formulation of the economic calculation problem, each of which has become an accepted part of mainstream economics.Since the mid-20th century, mainstream economists have been critical of the modern day Austrian School and consider its rejection of mathematical modelling, econometrics and macroeconomic analysis to be outside mainstream economics, or "heterodox". Although the Austrian School has been considered heterodox since the late 1930s, it attracted renewed interest in the 1970s after Friedrich Hayek shared the 1974 Nobel Memorial Prize in Economic Sciences.Capitalization rate
Capitalization rate (or "Cap Rate") is a real estate valuation measure used to compare different real estate investments. Although there are many variations, a cap rate is often calculated as the ratio between the net operating income produced by an asset and the original capital cost (the price paid to buy the asset) or alternatively its current market value.Carrying cost
In marketing, carrying cost, carrying cost of inventory or holding cost refers to the total cost of holding inventory. This includes warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost, and inventory costs related to perishability, shrinkage (leakage) and insurance. Carrying cost also includes the opportunity cost of reduced responsiveness to customers' changing requirements, slowed introduction of improved items, and the inventory's value and direct expenses, since that money could be used for other purposes. When there are no transaction costs for shipment, carrying costs are minimized when no excess inventory is held at all, as in a Just In Time production system.Excess inventory can be held for one of three reasons. Cycle stock is held based on the re-order point, and defines the inventory that must be held for production, sale or consumption during the time between re-order and delivery. Safety stock is held to account for variability, either upstream in supplier lead time, or downstream in customer demand. Physical stock is held by consumer retailers to provide consumers with a perception of plenty. Carrying costs typically range between 20-30% of a company's inventory value.Cost of capital
In Economics and Accounting, the cost of capital is the cost of a company's funds (both debt and equity), or, from an investor's point of view "the required rate of return on a portfolio company's existing securities". It is used to evaluate new projects of a company. It is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.Diminishing returns
In economics, diminishing returns is the decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.
The law of diminishing returns states that in all productive processes, adding more of one factor of production, while holding all others constant ("ceteris paribus"), will at some point yield lower incremental per-unit returns. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.
A common example is adding more people to a job, such as the assembly of a car on a factory floor. At some point, adding more workers causes problems such as workers getting in each other's way or frequently finding themselves waiting for access to a part. In all of these processes, producing one more unit of output per unit of time will eventually require increasingly more usage of the input, due to the input being used less effectively. Another well-studied example is throwing more headcount at software development, yielding Brooks's law.
The law of diminishing returns is a fundamental principle of economics. It plays a central role in production theory.Discounting
Discounting is a financial mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee. Essentially, the party that owes money in the present purchases the right to delay the payment until some future date. The discount, or charge, is the difference between the original amount owed in the present and the amount that has to be paid in the future to settle the debt.
The discount is usually associated with a discount rate, which is also called the discount yield. The discount yield is the proportional share of the initial amount owed (initial liability) that must be paid to delay payment for 1 year.
Since a person can earn a return on money invested over some period of time, most economic and financial models assume the discount yield is the same as the rate of return the person could receive by investing this money elsewhere (in assets of similar risk) over the given period of time covered by the delay in payment. The concept is associated with the opportunity cost of not having use of the money for the period of time covered by the delay in payment. The relationship between the discount yield and the rate of return on other financial assets is usually discussed in economic and financial theories involving the inter-relation between various market prices, and the achievement of Pareto optimality through the operations in the capitalistic price mechanism, as well as in the discussion of the efficient (financial) market hypothesis. The person delaying the payment of the current liability is essentially compensating the person to whom he/she owes money for the lost revenue that could be earned from an investment during the time period covered by the delay in payment. Accordingly, it is the relevant "discount yield" that determines the "discount", and not the other way around.
As indicated, the rate of return is usually calculated in accordance to an annual return on investment. Since an investor earns a return on the original principal amount of the investment as well as on any prior period investment income, investment earnings are "compounded" as time advances. Therefore, considering the fact that the "discount" must match the benefits obtained from a similar investment asset, the "discount yield" must be used within the same compounding mechanism to negotiate an increase in the size of the "discount" whenever the time period of the payment is delayed or extended. The "discount rate" is the rate at which the "discount" must grow as the delay in payment is extended. This fact is directly tied into the time value of money and its calculations.
The "time value of money" indicates there is a difference between the "future value" of a payment and the "present value" of the same payment. The rate of return on investment should be the dominant factor in evaluating the market's assessment of the difference between the future value and the present value of a payment; and it is the market's assessment that counts the most. Therefore, the "discount yield", which is predetermined by a related return on investment that is found in the financial markets, is what is used within the time-value-of-money calculations to determine the "discount" required to delay payment of a financial liability for a given period of time.Economic cost
Economic cost is the combination losses of any goods that have a value attached to them by any one individual. Economic cost is used mainly by economists as means to compare the prudence of one course of action with that of another. The goods to be taken into consideration are e.g. money, time and resources.
The comparison includes the gains and losses precluded by taking a course of action, as those of the course taken itself. Economic cost differs from accounting cost because it includes opportunity cost.Economic rent
In economics, economic rent is any payment to an owner or factor of production in excess of the costs needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities (e.g., patents). In the moral economy of neoclassical economics, economic rent includes income gained by labor or state beneficiaries of other "contrived" (assuming the market is natural, and does not come about by state and social contrivance) exclusivity, such as labor guilds and unofficial corruption.
In the moral economy of the economics tradition broadly, economic rent is opposed to producer surplus, or normal profit, both of which are theorized to involve productive human action. Economic rent is also independent of opportunity cost, unlike economic profit, where opportunity cost is an essential component. Economic rent is viewed as unearned revenue while economic profit is a narrower term describing surplus income earned by choosing between risk-adjusted alternatives. Unlike economic profit, economic rent cannot be theoretically eliminated by competition because any actions the recipient of the income may take such as improving the object to be rented will then change the total income to contract rent. Still, the total income is made up of economic profit (earned) plus economic rent (unearned).
For a produced commodity, economic rent may be due to the legal ownership of a patent (a politically enforced right to the use of a process or ingredient). For education and occupational licensing, it is the knowledge, performance, and ethical standards, as well as the cost of permits and licenses that are collectively controlled as to their number, regardless of the competence and willingness of those who wish to compete on price alone in the area being licensed. In regard to labor, economic rent can be created by the existence of mass education, labor laws, state social reproduction supports, democracy, guilds, and labor unions (e.g., higher pay for some workers, where collective action creates a scarcity of such workers, as opposed to an ideal condition where labor competes with other factors of production on price alone). For most other production, including agriculture and extraction, economic rent is due to a scarcity (uneven distribution) of natural resources (e.g., land, oil, or minerals).
When economic rent is privatized, the recipient of economic rent is referred to as a rentier.
By contrast, in production theory, if there is no exclusivity and there is perfect competition, there are no economic rents, as competition drives prices down to their floor.Economic rent is different from other unearned and passive income, including contract rent. This distinction has important implications for public revenue and tax policy. As long as there is sufficient accounting profit, governments can collect a portion of economic rent for the purpose of public finance. For example, economic rent can be collected by a government as royalties or extraction fees in the case of resources such as minerals and oil and gas.
Historically, theories of rent have typically applied to rent received by different factor owners within a single economy. Hossein Mahdavy was the first to introduce the concept of "external rent", whereby one economy received rent from other economies.Elasticity (economics)
In economics, elasticity is the measurement of the proportional change of an economic variable in response to a change in another. It shows how easy it is for the supplier and
consumer to change their behavior and substitute another good, the strength of an incentive over choices per the relative opportunity cost.
It gives answers to questions such as:
"If I lower the price of a product, how much more I will sell?"
"If I raise the price of one good, how will that affect the sales of this other good?""If the market price of a product goes down, how much will that affect the amount that firms will be willing to supply to the market?"An elastic variable (with an absolute elasticity value greater than 1) is one which responds more than proportionally to changes in other variables. In contrast, an inelastic variable (with an absolute elasticity value less than 1) is one which changes less than proportionally in response to changes in other variables. A variable can have different values of its elasticity at different starting points: for example, the quantity of a good supplied by producers might be elastic at low prices but inelastic at higher prices, so that a rise from an initially low price might bring on a more-than-proportionate increase in quantity supplied while a rise from an initially high price might bring on a less-than-proportionate rise in quantity supplied.
Elasticity can be quantified as the ratio of the percentage change in one variable to the percentage change in another variable, when the latter variable has a causal influence on the former. A more precise definition is given in terms of differential calculus. It is a tool for measuring the responsiveness of one variable to changes in another, causative variable. Elasticity has the advantage of being a unitless ratio, independent of the type of quantities being varied. Frequently used elasticities include price elasticity of demand, price elasticity of supply, income elasticity of demand, elasticity of substitution between factors of production and elasticity of intertemporal substitution.
Elasticity is one of the most important concepts in neoclassical economic theory. It is useful in understanding the incidence of indirect taxation, marginal concepts as they relate to the theory of the firm, and distribution of wealth and different types of goods as they relate to the theory of consumer choice. Elasticity is also crucially important in any discussion of welfare distribution, in particular consumer surplus, producer surplus, or government surplus.
In empirical work an elasticity is the estimated coefficient in a linear regression equation where both the dependent variable and the independent variable are in natural logs. Elasticity is a popular tool among empiricists because it is independent of units and thus simplifies data analysis.
A major study of the price elasticity of supply and the price elasticity of demand for US products was undertaken by Joshua Levy and Trevor Pollock in the late 1960s.Excess reserves
In banking, excess reserves are bank reserves in excess of a reserve requirement set by a central bank.In the United States, bank reserves for a commercial bank are held in part as a credit balance in an account for the commercial bank at the applicable Federal Reserve bank (FRB). This credit balance is not separated into separate "minimum reserves" and "excess reserves" accounts. The total amount of FRB credits held in all FRB accounts for all commercial banks, together with all currency and vault cash, form the M0 monetary base. Holding excess reserves has an opportunity cost if higher risk-adjusted interest can be earned by putting the funds elsewhere. For banks in the U.S. Federal Reserve System, this earning process is accomplished by a given bank in the very short term by making short-term (usually overnight) loans on the federal funds market to another bank that may be short of its reserve requirements. Over longer periods, banks have the opportunity to choose how much to hold in excess reserves versus in loans to the non-bank public. Therefore, the amount of its assets that a bank chooses to hold as excess reserves is a decreasing function of the amount by which the market rate for loans to the non-bank public from banks exceeds the interest rate on excess reserves and of the amount by which the federal funds rate exceeds the interest rate on excess reserves. Even with a substantial opportunity cost, banks may choose to hold some excess reserves to facilitate upcoming transactions or to meet contractual clearing balance requirements.Flux (political party)
Flux is a political movement which aims to replace the world's elected legislatures with a new system known as issue-based direct democracy (IBDD). Flux originated in and is most active in Australia, but it is also active internationally, with groups existing in the United States and Brazil.IBDD is similar to liquid democracy, though there are differences. In IBDD, voters would still have the right to vote directly on every issue or delegate their vote to someone else, but unlike in liquid democracy, voters can choose to forego votes on one issue to use on another issue. This creates opportunity cost between issues and allows voters to specialise their votes on the issues that are more important to them. This specialisation of votes allows citizens to participate effectively in issue-based direct democracy without having to focus on every issue as they would in regular direct democracy.
Software to implement IBDD is being developed by SecureVote, a startup company set up by Nathan Spataro and Max Kaye to bring Blockchain-based voting to Governments, Businesses and Token Ecosystems.Friedrich von Wieser
Friedrich Freiherr von Wieser (German: [ˈviːzɐ]; 10 July 1851 – 22 July 1926) was an early (so-called "first generation") economist of the Austrian School of economics. Born in Vienna, the son of Privy Councillor Leopold von Wieser, a high official in the war ministry, he first trained in sociology and law. In 1872, the year he took his degree, he encountered Austrian-school founder Carl Menger's Grundsätze and switched his interest to economic theory. Wieser held posts at the universities of Vienna and Prague until succeeding Menger in Vienna in 1903, where along with his brother-in-law Eugen von Böhm-Bawerk he shaped the next generation of Austrian economists including Ludwig von Mises, Friedrich Hayek and Joseph Schumpeter in the late 1890s and early 20th century. He was the Austrian Minister of Commerce from August 30, 1917 to November 11, 1918.
Wieser is renowned for two main works, Natural Value, which carefully details the alternative-cost doctrine and the theory of imputation; and his Social Economics (1914), an ambitious attempt to apply it to the real world. His explanation of marginal utility theory was decisive, at least terminologically. It was his term Grenznutzen (building on von Thünen's Grenzkosten) that developed into the standard term "marginal utility", not William Stanley Jevons's "final degree of utility" or Menger's "value". His use of the modifier "natural" indicates that he regarded value as a "natural category" that would pertain to any society, no matter what institutions of property had been established.The economic calculation debate started with his notion of the paramount importance of accurate calculation to economic efficiency. Above all, to him prices represented information about market conditions and are thus necessary for any sort of economic activity. Therefore, a socialist economy would require a price system in order to operate. He also stressed the importance of the entrepreneur to economic change, which he saw as being brought about by "the heroic intervention of individual men who appear as leaders toward new economic shores". This idea of leadership was later taken up by Joseph Schumpeter in his treatment of economic innovation.
Unlike most other Austrian School economists, Wieser rejected classical liberalism, writing that "freedom has to be superseded by a system of order". This vision and his general solution to the role of the individual in history is best expressed in his final book The Law of Power, a sociological examination of political order published in his last year of life.Microeconomics
Microeconomics (from Greek prefix mikro- meaning "small" + economics) is a branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.One goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions under which free markets lead to desirable allocations. It also analyzes market failure, where markets fail to produce efficient results.
Microeconomics stands in contrast to macroeconomics, which involves "the sum total of economic activity, dealing with the issues of growth, inflation, and unemployment and with national policies relating to these issues". Microeconomics also deals with the effects of economic policies (such as changing taxation levels) on microeconomic behavior and thus on the aforementioned aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theories has been built upon microfoundations—i.e. based upon basic assumptions about micro-level behavior.Outline of industrial organization
The following outline is provided as an overview of and topical guide to industrial organization:
Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions. Issues underlying these decisions range from classical issues such as opportunity cost to neoclassical concepts such as factors of production.Parable of the broken window
The parable of the broken window was introduced by French economist Frédéric Bastiat in his 1850 essay "Ce qu'on voit et ce qu'on ne voit pas" ("That Which We See and That Which We Do Not See") to illustrate why destruction, and the money spent to recover from destruction, is not actually a net benefit to society.
The parable seeks to show how opportunity costs, as well as the law of unintended consequences, affect economic activity in ways that are unseen or ignored. The belief that destruction is good for the economy is consequently known as the broken window fallacy or glazier's fallacy.Production–possibility frontier
A production–possibility frontier (PPF) or production possibility curve (PPC) is a curve which shows various combinations of the amounts of two goods which can be produced with the given resources and technology/a graphic representation showing all the possible options of output for two products that can be produced using all factors of production, where the given resources are fully and efficiently utilized per unit time. A PPF illustrates several economic concepts, such as allocative efficiency, economies of scale, opportunity cost (or marginal rate of transformation), productive efficiency, and scarcity of resources (the fundamental economic problem that all societies face).This tradeoff is usually considered for an economy, but also applies to each individual, household, and economic organization. One good can only be produced by diverting resources from other goods, and so by producing less of them.
Graphically bounding the production set for fixed input quantities, the PPF curve shows the maximum possible production level of one commodity for any given production level of the other, given the existing state of technology. By doing so, it defines productive efficiency in the context of that production set: a point on the frontier indicates efficient use of the available inputs (such as points B, D and C in the graph), a point beneath the curve (such as A) indicates inefficiency, and a point beyond the curve (such as X) indicates impossibility.
PPFs are normally drawn as bulging upwards or outwards from the origin ("concave" when viewed from the origin), but they can be represented as bulging downward (inwards) or linear (straight), depending on a number of assumptions.
An outward shift of the PPC results from growth of the availability of inputs, such as physical capital or labour, or from technological progress in knowledge of how to transform inputs into outputs. Such a shift reflects, for instance, economic growth of an economy already operating at its full productivity (on the PPF), which means that more of both outputs can now be produced during the specified period of time without sacrificing the output of either good. Conversely, the PPF will shift inward if the labour force shrinks, the supply of raw materials is depleted, or a natural disaster decreases the stock of physical capital.
However, most economic contractions reflect not that less can be produced but that the economy has started operating below the frontier, as typically, both labour and physical capital are underemployed, remaining therefore idle.
In microeconomics, the PPF shows the options open to an individual, household, or firm in a too good world. By definition, each point on the curve is productively efficient, but, given the nature of market demand, some points will be more profitable than others. Equilibrium for a firm will be the combination of outputs on the PPF that is most profitable.From a macroeconomic perspective, the PPF illustrates the production possibilities available to a nation or economy during a given period of time for broad categories of output. It is traditionally used to show the movement between committing all funds to consumption on the y-axis versus investment on the x-axis. However, an economy may achieve productive efficiency without necessarily being allocatively efficient. Market failure (such as imperfect competition or externalities) and some institutions of social decision-making (such as government and tradition) may lead to the wrong combination of goods being produced (hence the wrong mix of resources being allocated between producing the two goods) compared to what consumers would prefer, given what is feasible on the PPF.Rebellion
Rebellion, uprising, or insurrection is a refusal of obedience or order. It refers to the open resistance against the orders of an established authority.
A rebellion originates from a sentiment of indignation and disapproval of a situation and then manifests itself by the refusal to submit or to obey the authority responsible for this situation. Rebellion can be individual or collective, peaceful (civil disobedience, civil resistance, and nonviolent resistance) or violent (terrorism, sabotage and guerrilla warfare.)
In political terms, rebellion and revolt are often distinguished by their different aims. If rebellion generally seeks to evade and/or gain concessions from an oppressive power, a revolt seeks to overthrow and destroy that power, as well as its accompanying laws. The goal of rebellion is resistance while a revolt seeks a revolution. As power shifts relative to the external adversary, or power shifts within a mixed coalition, or positions harden or soften on either side, an insurrection may seesaw between the two forms.Trade-off
A trade-off (or tradeoff) is a situational decision that involves diminishing or losing one quality, quantity or property of a set or design in return for gains in other aspects. In simple terms, a tradeoff is where one thing increases and another must decrease. Tradeoffs stem from limitations of many origins, including simple physics – for instance, only a certain volume of objects can fit into a given space, so a full container must remove some items in order to accept any more, and vessels can carry a few large items or multiple small items. Tradeoffs also commonly refer to different configurations of a single item, such as the tuning of strings on a guitar to enable different notes to be played, as well as allocation of time and attention towards different tasks.
The concept of a tradeoff suggests a tactical or strategic choice made with full comprehension of the advantages and disadvantages of each setup. An economic example is the decision to invest in stocks, which are risky but carry great potential return, versus bonds, which are generally safer but with lower potential returns.
The term is also used widely in an evolutionary context, in which case the processes of natural selection and sexual selection are in reference as the ultimate decisive factors. In biology, the concepts of tradeoffs and constraints are often closely related. In economics, a trade-off is commonly expressed in terms of the opportunity cost of one potential choice, which is the loss of the best available alternative.An opportunity cost example of trade-offs for an individual would be the decision by a full-time worker to take time off work with a salary of $50,000 to attend medical school with annual tuition of $30,000 and earning $150,000 as a doctor after 7 years of study. If we assume for the sake of simplicity that the medical school only allows full-time study, then the individual considering stopping work would face a trade-off between not going to medical school and earning $50,000 at work, or going to medical school and losing $50,000 in salary and having to pay $30,000 in tuition but earning $150,000 or more per year after 7 years of study.Welfare trap
The welfare trap (or unemployment trap or poverty trap in British English) theory asserts that taxation and welfare systems can jointly contribute to keep people on social insurance because the withdrawal of means-tested benefits that comes with entering low-paid work causes there to be no significant increase in total income. An individual sees that the opportunity cost of returning to work is too great for too little a financial return, and this can create a perverse incentive to not work.