View FREE Lessons!

Definition of Trade-Offs:

Trade-Offs are all of the opportunities given up when a choice is made.

Detailed Explanation:

We make many decisions every day on how to use our scarce resources such as time and money. All our decisions have trade-offsFor example, what are some of your trade-offs in choosing to go to the movies with your friends? There is the cost: say, $8 for a ticket, $4 for the popcorn and drink, and $1 for the gas to get to the theater. Perhaps you would not be able to go out to eat with your family, or spend the three hours on a paper you really want to get written so you can go horseback riding tomorrow. Each of these is a trade-off. Anything that is given up when you make a decision is a trade-off.

Economists refer to the most valued trade-off, or the next best alternative, as the opportunity cost of a decision. 
Investors should evaluate their appropriate tolerance to risk before making any investment because there is a trade-off between an investment's risk and potential return. For example, an investment in US Treasury bills is considered risk-free but pays a very low return. Investments in stocks carry a much greater potential return, but also a higher risk of loss. This is a risk-return trade-off. Risk-return trade-offs are not just in investing. For example, shooting a three-pointer in basketball is riskier than a two-pointer, but many coaches believe the risk is worth the potential return if they have a good shooter.

Dig Deeper With These Free Lessons:

Opportunity Cost – The Cost of Every Decision
Production Possibilities Frontier
Fundamental Economic Assumptions
Marginal Analysis – How Decisions Are Made

Search the Glossary

Investment Calculator:

Market Overview:

Market quotes are powered by

Single Quote:

© Higher Rock Education and Learning, Inc. All rights reserved. No portion of this site may be copied or distributed by any means, including electronic distribution without the express written consent of Higher Rock Education and Learning, Inc.