Question

1. Define scarcity. What signifies to managers that a resource used in production is becoming scarce? What impact does this have on management decisions?

2. Define economic profit. Explain how economic profit is different than accounting profit. Why is it important for economists to measure economic profit rather than just sticking to the accounting profit used in accounting and finance?

3. When analyzing decisions that are made within a firm, economists typically assume that “profit maximization” is the firm’s main goal. However, a number of other goals are also possible. Choose one of the “other” possible goals and compare it to “profit maximization.” Under what circumstances might the “other” goal that you described become a major focus for the firm? If you were the CEO of a large firm, what steps might you take to ensure that departments within the firm are working together toward common goals?

4. Under what circumstances would a firm benefit from outsourcing a portion of its business operations? What are the major costs and benefits that would need to be considered when deciding to outsource? (Identify at least two costs and two benefits.)

Answer 1

Scarcity means quantity of resources are less that required to produce a good or service or to satisfy needs. Increasing price of resource may show its scarcity. Management may have to provide higher outlay for the resource or to decide to use substitutes.

2 economic profit is over and above the normal costs of production. It is above accounting profit. Accorting profit does not take into consideration the opportunity cost of entrepreneur service provided by entrepreneur etc. Economists have to take into account economic profits because accounting profits are actually costs of production including implicit cost. Only when firm is making economic profit is there incentive for entry etc. It also shows whether firm is making abnormal profits.

Sales maximisation is another goal. It occurs when price covers cost of production and maximum quantities possible are produced and sold subject to this constrain. Profit maximisation offers before sales maximisation. It might become focus when owners and managers are different and when there is less chance of takeover by rival firms. If I were ceo I will keep checking whether production department, sales department, research department are focusing on one goal say sales maximisation. I will then constantly monitor sales department to see whether it is making all efforts for promoting sales, will check whether production is kept maximum subject to satisfaction of sales maximisation condition and so on

Outsourcing will benefit when it is more profitable to outsource. It will also benefit if firm wants to focus only on core activities and when there is appreciation of currency and so on. The major costs that are to be considered are unemployment, reliance on others, delays etc. The major benefits to be considered are profits due to outsourcing, shifting focus from ancillary works, impact of focusing on core activities etc.