- An understanding of opportunity cost may change many decisions made by businesses
- Factoring the opportunity cost into a decision often results in different outcomes & so a different allocation of resources
- A trade-off occurs when two things cannot be fully achieved
- Having more of one thing may mean having less of another
Examples of Potential Trade-offs
Focus
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Explanation of the Trade-off
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Product
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- Choosing to spend money upgrading an existing product may result in the loss of the next best alternative - research and development on a new product
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Customer sales
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- A firm selling organic avocados are offered a supply contract by a supermarket who wants to buy all of their stock each month, but at a low price
- The supermarket is a prestigious customer
- The firm decides to not accept the contract as the opportunity cost (loss of prestigious customer) is worth less than the lost revenue to existing customers
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Market research
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- Foregoing market research may help the business to get its product to market quicker, however, the trade off is that the product may not have the features/qualities desired by the market
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Business ownership
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- Choosing to operate as a partnership will mean that a business loses the benefits of operating as a private limited company (Ltd)
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Promotional methods
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- Businesses have a limited amount of money to spend on promoting their products. Choosing to sponsor an elite athlete means that the business may have to give up other forms of promotion, such as radio advertising
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Pricing strategy
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- If a business decides to use a competitive pricing strategy it loses the opportunity to price skim
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