Trade offs are the costs and benefits obtained by taking a particular decision. Trade off analysis provide with the best decision to implement when comparing different activities. Each activity undertaken by an individual has costs and benefits. But the amount of costs and benefits differ and it is the discretion of an individual to determine the best activity to undertake (Krugmanwells, 2008). A trade off involves foregoing one activity which has more costs and pursuing another activity with higher benefits. In real life experience, a manufacturer may decide to install a new machine with higher production efficiency.
As such, a cost will be incurred to establish the new system but the benefits of installing new machines supersede the costs. Opportunity costs refer to the forgone opportunity to undertake a particular activity. Since resources are scarce, a person must sacrifice some opportunities so as to pursue other activities (Krugmanwells, 2008). For example, a farmer has many opportunities to grow different crops in his/her farm. However, only one crop can be grown at a particular season. He/she will be forced to grow a particular crop instead of another.
Opportunity cost reflects the true value of producing a particular commodity since it represents the lost opportunities. Marginal analysis provides a person with the appropriate decision about how much of a commodity to produce relative to another. Margin is the amount of one commodity that must be sacrificed to produce another (Krugmanwells, 2008). In the example of a farmer, he may decide to grow different crops on a portion of land such that there are different crops in the farm. But the farmer must decide how much to grow of a particular crop variety. This will be determined by the conditions surrounding the farmer.
Market equilibrium is a situation where both buyers and sellers have agreed. There is no individual buyer or seller at a better position. Both parties are satisfied by the commodities and prices at the market place. At equilibrium, there are no opportunities that remain for the individuals to make themselves better than others in the market environment. The buyers and sellers are satisfied by the market conditions since buyers feel that the commodities satisfy their needs at particular prices while the sellers feel that the price meets the value of their products. Market equilibrium exists only when there are no government interventions.
A free market situation is the most effective system since the forces of supply and demand dictate the prices of commodities as well as determining the quantity demanded and supplied (krugmanwells, 2008). Source: Author From the above diagram, the equilibrium shows intersection between supply and demand. Market equilibrium shows the quantity of a commodity that the sellers are willing to supply at a given price. It also provides information about the quantity of commodities that buyers are willing to buy at a particular price. Government intervenes when market efficiency is not achieved.
As the market factors interact, they improve the welfare of the people involved by creating systems which satisfy both sellers and buyers. Market inefficiencies occur when one party benefits more at the expense of the other party. The government intervenes to provide equality and restore market equilibrium. Unintended consequences are the unexpected effects of individual actions in the market. As buyers and sellers interact in the market, they may unintentionally conduct some activities which affect others. An example of unintended consequences is pollution. Reference Krugmanwells (2008). First principles of Economics. worthpublishers