Trade-Off

Trade-off lies at the heart of economics; a social science that studies the choices of individual and group in coordinating their wants and needs given the scarce resources. When choice is made to accept having less of one thing in order to get more of something else, the result is called trade-off. A trade-off entails that one thing has to be discarded to obtain more of another.

Trade-off creates opportunity cost, the thing that is not chosen whenever a trade-off is made. Opportunity cost is inclined by the benefits that could have been obtained by choosing the best alternative opportunity.

A market economy has always been confronted with three fundamental and interdependent coordination problems: what, how, and for whom the goods/services are produced. The market works to address these problems through spontaneous coordination of people, activities, and business as an elaborate mechanism.

Nevertheless, market mechanism – with its invisible hand – does not always work perfectly to create an efficiently ordered, stable, and fair market. Instead, the imperfect market mechanism could lead to inefficiency, instability and inequality.

Accordingly, the government – with its visible hand – is required to enhance efficiency, stability, and equality. In this regard, the government is expected to correct market failures: pursue economic growth, price stabilization, full employment; and redistribute the income.

The government’s visible hand is exposed in its four functions:

Adopt the regulatory framework for market mechanism
Affect economic efficiency of resources allocation
Govern economic stabilisation
Affect the distribution of income

These functions are performed through economic policies as the outcomes of political and technocratic decision making process by considering all relevant domestic factors and, if required, taking into account external economic context.

The policy making involves trade-offs amongst multiple, sometimes conflicting, objectives. The process has to make choices among different competing policies, and hence adopting one of these policies might imply cutting back the others. Yet, most of policy trade-offs are not all-or-nothing decisions; rather they aim to reach a certain degree of Pareto Improvement: makes a specific policy objective better-off by minimising the others’ worse-offs.

In turn, government economic policies affect trade-offs that companies and consumers, as the economic actors, have to make. In search of maximum profit, companies make various strategic trade-offs, which they must fine-tune whenever the economic policies affect business operation. In search of better living, consumers need to adjust their marginalism and make trade-offs to obtain an affordable mix of products whenever the economic policies affecting the prices and purchasing power.

Ultimately, economic policies affect the economic state of play, which reflect the government’s effectiveness in intervening the market.