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Consider a scenario where resources are inadequate and that there is a need to choose between some mutually exclusive options, then the opportunity cost is the value of the best alternative forgone. In other words, it is the alternative high valued use of the resource. Once the best alternative has been selected, then the opportunity cost is the cost incurred by not enjoying the value that would have been derived from the second alternative. The concept of mutually exclusive implies that these activities cannot be executed concurrently. Thus, once one activity has been selected, the other activity will be left out. A good example of opportunity cost can be seen in government subsidies on university education. It is always perceived that university a student pays less than half of the total fees while the government subsidy caters for the reminder. However, in the real sense, students pay for more than half of the fees.
Consider a scenario where a student pays an annual university tuition fee amounting to $5,000 in a state-owned institution. Assume that the amount of government subsidy is $15,000 per student. Therefore, it will appear that the total amount of the fee is $20,000 and that the student pays less than half of the fees. However, the cost forgone by attending the university is not included. By attending university, the student would forgo working. Therefore, assume that the annual salary that the student would have earned from working amounts to $30,000. Therefore, the true cost of attending university is $50,000 ($20,000 + $30,000). Thus, by attending university, the student will incur a total cost of $35,000 ($30,000 in foregone salary and $5,000 in fees). Even though the subsidy appears as substantial, the student pays 70% of the whole cost of attending university. Opportunity cost is a powerful tool in economics because it depicts the association between scarcity and choice. Therefore, it ensures that limited resources are used efficiently.
The concept of elasticity is quite significant when evaluating demand and supply. It gives information on how both the buyers and suppliers will react to the constantly changing market conditions. Thus, elasticity can be viewed as a measure that estimates how a change in one variable affects another variable. From a mathematical point of view, elasticity is arrived at through the division of a percentage change in one variable and a percentage change in another variable. Some of the specific elasticities in economics are broadly divided into elasticities of demand, elasticities of the scale, and elasticities of supply. However, there are several elasticities under these three broad categories. For instance, under elasticity of demand, we have the price elasticity of demand, income elasticity of demand, and cross-price elasticity of demand. Further, the coefficient of elasticity can indicate whether the relationship between the two variables being studied is inelastic, elastic, perfectly inelastic, perfectly elastic, and unit elastic. Thus, elasticity helps in evaluating how demand, supply, and production will change when there are changes in the factors that affect these variables. In real life, the concept of elasticity is used in various areas such as understanding the behavior of consumers, welfare, the firm, and taxation.
From an economic point of view, the market is described as a platform where buyers and sellers meet to exchange goods and services. The interaction between the two players can take place either directly or indirectly through agents or institutions. Therefore, the concept of a market is not just limited to a physical place where buyers and sellers meet to exchange, but it also covers a geographical region where various sellers of goods and services compete for customers. In many cases, markets comprise several intermediaries between the first person who sells the commodity and the final person who will purchase the commodity. Size, place, taxes, prices, and information asymmetry among others, can make markets differ. Since there are strictly two players in the market, the buyer and seller, then the law of demand and supply are vital when analyzing a market.
Demand and supply are the foundation of any economic analysis as the interaction of the two forms an equilibrium. The law of demand and supply works in divergent ways in the sense that, for a normal good, when the prices of commodities change, demand and supply will change in opposite direction holding other factors constant. Equilibrium is quite important in the market because it gives information on the prevailing price and quantity in the market. At equilibrium, the market is stable. The market is considered to be self-correcting. This implies that in case of disequilibrium, the market will adjust its self to restore the equilibrium state. For instance, if there is excess demand in the market, it implies that the demand exceeds supply and it is disequilibrium. In this case, the market will correct itself through a price increase. On the other hand, in case of a surplus, the market will correct itself through a price decrease and the equilibrium will be restored. From an economic point of view, there are different forms of markets. Examples are a perfectly competitive market, monopoly, monopolist, and oligopoly market among others. These markets are defined by the number of buyers and sellers, ease of entry, and how the price is determined.
Under managerial economics, business scenarios are evaluated using economic models. The field incorporates business practice and economic theory to enhance the decision-making process and planning. The process of integrating economic theory into business management has four aspects. The first aspect entails the unification of economic theoretical ideas relative to the real business conditions and conduct. The second aspect entails coming up with economic relationships. In this aspect, various elasticities are estimated. The third aspect entails forecasting appropriate economic quantities. The final aspect is using economic quantities to make decisions and plan for the future. Thus, managerial economics assist in developing business policies and planning for the future. Further, the field of managerial economics has three main characteristics.
First, the field of managerial economics puts a lot of emphasis on microeconomics because it focuses on the theory of the firm. Secondly, it is practical. This implies that it ignores abstract issues in economic theory and focuses on decision making. Finally, managerial economics involves value judgments and ethical precepts about an economy. It avoids describing the facts and behavior of an economy. In an organization, managerial economics is used in different areas such as an appraisal of investment projects, evaluation and management of risk, determination of prices of commodities, and evaluation of the manufacturing process among others. Further, function of managerial economics plays an important role in a company. First, it brings out the areas in economics that are relevant in decision making. Secondly, it improves the decision making process and the quality of decisions made by businesses. Finally, managerial economics integrates different departments in an organization. This makes management easy. The discussion above shows how important the integration of economics and business management is to an organization.
Price elasticity of income
The price elasticity of income can be understood from the concept of price elasticity of demand. Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. Therefore, price elasticity of income is the percentage change in income divided by the percentage in price. It estimates how changes in price affect income earned. If the coefficient calculated is less than one, then it implies that the relationship between the two variables is inelastic. This implies that income does not respond strongly to the changes in price. On the other hand, if the estimated coefficient is more than one, then it implies that the association between the two variables is elastic. Thus, income strongly responds to changes in prices.