Economics – The basic economic problem - The nature of the basic economic problem | e-Consult
The basic economic problem - The nature of the basic economic problem (1 questions)
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Expanding production is a significant decision for a firm, and it involves weighing potential benefits against considerable costs. The firm must consider a range of factors, all stemming from the fundamental economic problem of scarcity.
Factors to Consider:
- Demand Analysis: Is there sufficient demand for the additional output? If demand is low, the firm may not be able to sell the extra product, leading to losses. This relates to scarcity because the firm must allocate resources to a product with a likely return.
- Cost Analysis: What are the costs of expanding production? This includes capital costs (new machinery, buildings), variable costs (increased raw materials, labor), and fixed costs (increased rent, utilities). The firm needs to assess whether the potential revenue from the expanded output will cover these costs.
- Profitability: What is the expected profit from the expansion? The firm needs to forecast revenue and costs to determine whether the expansion will be profitable. This is a direct consequence of scarcity – the firm must make choices to maximize limited resources.
- Market Competition: How will competitors react to the expansion? If competitors lower prices or increase their own production, the firm's profitability may be affected. This highlights the scarcity of market share and the need for strategic decision-making.
- Resource Availability: Does the firm have access to the necessary resources (labor, raw materials, capital) to support the expansion? Scarcity of resources could prevent the expansion from being feasible.
The firm's decision to expand or not is a direct result of its attempt to allocate scarce resources in the most efficient way possible. It's a trade-off between the potential benefits of increased output and the costs of using limited resources. The firm must carefully consider all factors to make an informed decision that maximizes its profitability within the constraints of scarcity.