Chat with AI
Managerial Economics 7th Edition by Paul Keat ,Philip Young,Steve Erfle
Edition 7ISBN: 978-0133020267Managerial Economics 7th Edition by Paul Keat ,Philip Young,Steve Erfle
Edition 7ISBN: 978-0133020267 Exercise 1
Define scarcity and opportunity cost. What role do these two concepts play in the making of management decisions
Explanation
Verified
Verified
Scarcity : Scarcity is simply a situation where resources are limited and wants are unlimited. It can be defined as a condition in which human wants exceed the available resources necessary to cater to those demands. It means demand is more than the supply, or people want more than is available. As, scarce resources have alternative uses, choice becomes unavoidable. Because of the scarcity of economic resources consumers, producers and government must make choices. Choices must be made regarding the use of these scarce resources in the production, distribution and consumption of goods and services. To make a choice, simply means to trade-off one choice with other.
Therefore, Scarcity is a cause of economic problems. Various economic decisions have to be made to allocate the insufficient productive resources efficiently to cater to the unlimited human wants.
Opportunity Cost : Opportunity is the outcome of scarcity. An opportunity cost is the value of the second best alternative that is forgone when a choice is made. In other words, opportunity cost can be defined as the benefits that could have been received if other alternative choice was made.
As there are alternative uses of scarce economic resources, need arises to select the best way to use these resources (say land, labour and capital). When one alternative is chosen over other, the next best alternative which is forgone is called opportunity cost of making a choice, because we give up the opportunity to have other desirable things.
The concepts of scarcity and opportunity cost play a very important role in managerial decision making. Scarcity and opportunity cost are interlinking concepts. Scarcity is the root cause of all economic problems therefore it is central to all economic decisions. Its importance in managerial decision making lies in taking decisions regarding allocation of scarce resources. For example, if a company is in the business of beverages and food. And it has an expansion plan. There are limited resources of capital and labour which can be employed in either of the businesses. As resources are scarce, if the company allocate more resources to beverage business, it will have fewer resources for food business. Therefore, the company need to make a choice and decisions regarding allocation of these scarce resources among the two businesses. This involves trade off among the two choices. If the company makes the choice and decides to allocate resources in beverage business, it will forgo the food business, which will the opportunity cost of the choice the business has made. Or, this trade off is the forgone next best option which represents the opportunity cost.
The opportunity cost of the value of opportunity lost is taken into consideration when alternatives are compared. It measures the benefit of opportunity forgone.
Therefore, both the concept of scarcity and opportunity cost are helpful in managerial economics in evaluating the various alternatives available when scarce economic resources are employed for various uses.
Therefore, Scarcity is a cause of economic problems. Various economic decisions have to be made to allocate the insufficient productive resources efficiently to cater to the unlimited human wants.
Opportunity Cost : Opportunity is the outcome of scarcity. An opportunity cost is the value of the second best alternative that is forgone when a choice is made. In other words, opportunity cost can be defined as the benefits that could have been received if other alternative choice was made.
As there are alternative uses of scarce economic resources, need arises to select the best way to use these resources (say land, labour and capital). When one alternative is chosen over other, the next best alternative which is forgone is called opportunity cost of making a choice, because we give up the opportunity to have other desirable things.
The concepts of scarcity and opportunity cost play a very important role in managerial decision making. Scarcity and opportunity cost are interlinking concepts. Scarcity is the root cause of all economic problems therefore it is central to all economic decisions. Its importance in managerial decision making lies in taking decisions regarding allocation of scarce resources. For example, if a company is in the business of beverages and food. And it has an expansion plan. There are limited resources of capital and labour which can be employed in either of the businesses. As resources are scarce, if the company allocate more resources to beverage business, it will have fewer resources for food business. Therefore, the company need to make a choice and decisions regarding allocation of these scarce resources among the two businesses. This involves trade off among the two choices. If the company makes the choice and decides to allocate resources in beverage business, it will forgo the food business, which will the opportunity cost of the choice the business has made. Or, this trade off is the forgone next best option which represents the opportunity cost.
The opportunity cost of the value of opportunity lost is taken into consideration when alternatives are compared. It measures the benefit of opportunity forgone.
Therefore, both the concept of scarcity and opportunity cost are helpful in managerial economics in evaluating the various alternatives available when scarce economic resources are employed for various uses.
Managerial Economics 7th Edition by Paul Keat ,Philip Young,Steve Erfle
Why don’t you like this exercise?
Other Minimum 8 character and maximum 255 character
Character 255
