The basic economic problem that every individual, business and country faces is the matter of scarcity and how to effectively make and allocate their scarce possessions (Austin Community College District | Start Here. Get There, n.d.). They deal with the matter of how, what, and for whom to produce using the available scarce resources. Scarcity explains a situation with a limited supply of things and possessions. Nations, people and businesses have unlimited wants, and due to that, they desire to use more than can be produced (scarcity). To have unlimited wants means no eventuality exists to the amount of things people, countries and organizations would desire to use. Under a command process, the country’s government solely makes decisions and controls the production and allocation of economic things. The government will deal with the fundamental economic problem by effectively deciding on how, what and for whom to make using the available scarce resources. The government can fix quotas and ration resource distribution to decrease economic demand and effectively solve the matter of scarcity. While under the market process, the economic activities of a country are directed by the forces of demand and supply.
Thus, the response to the basic economic problem of how, what, and to whom to produce is effectively answered by economic agents, including producers, vendors and consumers. For instance, economic agents can raise prices in the economy to decrease demand and solve the issue of scarcity. Economic profits are the finances a firm earns after considering implicit and explicit costs. It is a type of profit obtained from the production of things whilst considering the alternate utilization of a firm’s resources. It subtracts explicit costs from total revenue and considers the opportunity costs experienced within that time. Implicit costs are the costs of a firm’s resources and are included. Thus, economic profit equals total revenue minus the summation of aggregate explicit and implicit costs. While accounting profit refers to the net income a firm has or the revenue minus the firm’s expenses. It is the profit a firm earns after subtracting the total revenue or sales and different expenses. Simply put, economic profit is the firm earnings after subtracting implicit and explicit costs from the aggregate revenue. While accounting profit is the firm’s earnings after subtracting explicit costs of operating an enterprise from total revenue or sales.
It is significant to consider the opportunity costs (implicit costs) during investment decisions as it aids an investor in analyzing the potent proceeds and risks linked to different investment alternatives. When an investor considers investment opportunities, they must evaluate the opportunity costs of selecting an investment at the expense of another or alternate uses of their money. For instance, if one has the alternative of investing in two unique stocks, one must consider the potent proceeds of every stock and the opportunity cost of selecting one over another. Opportunity cost is the money the investor could have saved or invested in stock B if they chose to invest in stock A. Simply, opportunity cost is the cost of the other great alternative given up when making a choice.
References
(n.d.). Austin Community College District | Start Here. Get There. https://www.austincc.edu/sondg/handouts/micro/BasicEconomicProblem.pdf
write