Scarcity and how it Applies to Micro-Economic Decision Making Essay

Scarcity and how it Applies to Micro-Economic Decision Making - Essay Example It is a fact that if anything is scarce it will definitely have a higher market value compared to those goods and services which are relatively widely available. (Riley 2006)i Scarcity essentially raises the question of which alternative to choose and which is better in which condition. These various choices have to be made on a daily basis by all consumers, firms and governments. (Steven 2011)iiA simple example is how the millions of people in New York City get to work. This choice of which mode of travel to take in order to get to their required destination in the least and most cost-effective amount of time is what troubles everyone. These small decisions are taken on an extensive scale on a daily basis and for most of the individuals this is more of a habitual routine than a choice but still at the first instance they had to figure out which mode is the best for them. This concept is followed by the most important concept in microeconomics, Opportunity Cost. Opportunity Cost meas ures the cost of any choice in terms of the next best alternative forgone. This can apply to individuals, firms and governments. For an individual whether to work extra hours or give more time to family for leisure is a choice that has to be made on a regular basis. For a government, it has to decide whether to allocate its limited budget to military or education or health. For a firm, it has to decide which machinery to use to produce the most output in the least amount of time maintaining quality. All this is not only a decision that is made without conscious thinking, it requires a lot of conscious effort from the individual’s part to investigate which option is best for him. This involves a rational Cost-Benefit Analysis. A Cost-Benefit Analysis is the process whereby individuals decide whether the advantages of a particular option are likely to outweigh its drawbacks. This is highly specific as all the known information for the available alternatives has to be taken into account and after comparing it with each other it has to be decided upon which alternative is giving the most benefit after accounting for its drawbacks (net benefit). On a micro-level thousands of millions of decisions take place to counter this problem of scarcity. A firm has to constantly perform assessment whether to hire new workers or request their existing workers to give extra hours in order to produce the excess demand. A separate department usually exists in MNC’s which has the responsibility to undertake extensive in-depth research in major financial decisions. For example, acquiring of new capital costing millions of dollars $ might be a better option than upgrading existing capital equipment. Although the initial cost will be high but the long term benefit of the first choice will outweigh the benefit of the second option. In Africa, governments have to constantly engage in a battle against poverty, healthcare and education. The question which is more important is debatable. Which sector should be given more preference depends on the positive impact it will have on the community and society on the whole. It can also mean that in a battle to provide everyone clean water and food, government might not reach its set goal for education. (CBC 2011)iii Nevertheless, it has to be viewed in such a perspective that if people are not provided the basic