Managerial Economics

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Assignment #1

1.Define scarcity and opportunity cost. What role d these concepts play in the making of management decisions? Scarcity is a condition that exists when resources are limited relative to the demand for their use. Another way of describing this condition is to state that scarcity exists when resources are not available in unlimited amounts. When resources are available in unlimited amounts, economists consider them to be “free” goods. Because of the scarcity of resources, choices have to be made about their allocation among competing uses. Each choice is considered by economists to involve an “opportunity cost” because the use of scarce resources in one activity implies that they cannot be used in an alternative one. In other words, this opportunity cost is the amount that is sacrificed when choosing one activity over its next best alternative.

It is reasonable to assume that all organizations have to work with scarce resources, no matter how large or profitable. A key role that managers play is to decide how best to allocate their organizations’ scarce resources. From an economic standpoint, optimal decisions involve their weighing of the benefits associated with a particular decision against the opportunity cost of this decision.

2.Define the market process, the command process, and the traditional process, How does each process deal with the basic questions of what, how and for whom.?

Market Process: The use of supply, demand and material incentives (e.g., the profit motive) to decide how scarce resources are to be allocated. It answers the three questions of what, how and for whom in the following ways:

“What?”—Whatever is profitable will be produced. Profitability in turn depends on the strength of a society’s demand for a particular good or service and the cost to producers of providing such a good or service.

“How?”—Resources should be allocated and combined in the least costly way.

“For...
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