Davenport University Economics: Basic Foundational Economic Concepts

This assignment provides a comprehensive analysis of foundational economic concepts. It begins by defining scarcity and its implications for resource management, discussing demand-induced and supply-induced scarcity, and the importance of opportunity cost in decision-making. The assignment then explains economic profit, differentiating it from accounting profit and highlighting the significance of time horizons in business decisions. It further explores opportunity cost as the value of the next best alternative, illustrating its application through a case study involving machine purchase versus firm expansion. The concept of sales maximization is also discussed, contrasting it with profit maximization and emphasizing its role in increasing market share. Finally, the assignment examines the advantages of outsourcing, including cost reduction, focusing on core activities, and risk management, while also acknowledging potential associated costs and risks. The assignment uses a clear structure and provides relevant references to support the analysis, making it a valuable resource for students studying economics.

Running Head: BASIC FOUNDATIONAL ECONOMIC CONCEPT
Basic Foundational Economic Concept
Mohammed Rahman
Davenport University

BASIC FOUNDATIONAL ECONOMIC CONCEPT1
Table of Contents
Answer 1:.........................................................................................................................................2
Answer 2:.........................................................................................................................................2
Answer 3:.........................................................................................................................................3
Answer 4:.........................................................................................................................................4
Answer 5:.........................................................................................................................................5

BASIC FOUNDATIONAL ECONOMIC CONCEPT2
Answer 1:
Scarcity implies an economic condition where a product, with its present market demand,
has limited availability (Kalaitzi, Matopoulos, Bourlakis & Tate, 2018). This concept also has
another implication from the economic point of view, which states about the limited purchasing
power of an individual where the person has unlimited wants.
Increasing demand for a resource or a factor of production over its limited supply
indicates that the concerned resource is becoming scarce. The manager can face this economic
phenomenon from two different aspects, which are demand induced and supply induced scarcity.
Remaining the supply at the same level, when the demand for a resource of production increases,
scarcity occurs that leads an increase in price (Pedro-Monzonís, Solera, Ferrer, Estrela &
Paredes-Arquiola, 2015). Supply induced scarcity, states the same scenario but from the supply
side perspective. In both situations, the manager is going to face an increasing amount of price
for that resource.
Due to resource scarcity, it is essential for the production management team to choose an
alternative production strategy with alternative and available resources. In this context, the
concept of opportunity cost has played a vital role regarding the selection of alternative resources
(Kalaitzi, Matopoulos, Bourlakis & Tate, 2018). The opportunity cost refers the value that a
producer losses by choosing its best alternative.
Answer 2:
Economic profit states the situation where the amount of total revenue of a firm exceeds
its total costs. Total revenue implies that amount, which the firm earns by selling its output in

BASIC FOUNDATIONAL ECONOMIC CONCEPT3
market (Eschert, Diehl & Ziegler, 2017). Total costs consist of both opportunity cost and implicit
cost.
Accounting profit of a firm measures its actual gain, which is calculated by generally
accepted accounting principle (GAAP). This profit states the difference between total revenue
and total costs of this firm (Kim & Im 2017). The chief difference between accounting cost and
economic cost is based on its time. While accounting profit takes limited time, economic profit
considers longer time span.
As accounting profit only considers limited time, the producer takes in under
consideration to measure costs and revenue for a single time-period, for instance, a fiscal year
(Eschert, Diehl & Ziegler, 2017). On the other side, as economic profit considers longer time-
period, a producer takes business decision regarding exit or enter a market.
Answer 3:
The opportunity cost, sometimes refers as alternative cost, implies the amount of benefit
that a producer gives up by choosing alternative course of action, during the decision-making
procedure. Hence, this cost is relevant for two mutually exclusive outcomes (Trinks & Scholtens,
2017). Under a production procedure, both explicit costs and implicit costs refer the opportunity
costs, where explicit costs involve costs of production factors and implicit costs involve hidden
costs that are not shown in cash flows.
The company has earned excess profit worth $450000, in the past year. For production
propose, the company can either buy a machine or can expand its firm size with this amount.
However, the producer has finally decided to buy machine for increasing total amount of
production and has scarified the amount of revenue that could be earned by expanding firm size.

BASIC FOUNDATIONAL ECONOMIC CONCEPT4
In this scenario, the price of machine is represented as explicit cost, which is $ 45, 0000.
The opportunity costs are the amount of revenue that the company could earn by expanding its
firm size.
After comparing the amount of opportunity costs from those two options, the producer
has come to this decision. By expanding the firm size, the producer could earn $50,0000 amount
of excess profit while, by installing new machines, the company has earned $ 70,0000 amount of
excess profit, within first six months of the present year (Trinks & Scholtens, 2017). Hence, the
opportunity cost of firm expansion is greater than that of machine purchase and from this point
of view, the producer has taken this decision.
Answer 4:
In general, the chief motive of a firm is to maximise profit. However, a producer also has
some other possible options and among those, the concept of sales maximisation can be
described in his context.
Sales maximisation refers that business activity, where a firm targets to increase its total
sales without incurring any loss (Szychta & Tymiński, 2015). By applying economic implication,
it can be said that the firm is receiving only normal profits as it charges less price to increase the
amount of output sale. This is the chief difference between profit maximisation and sales
maximisation.
To increase the market share, a firm adopts sales maximisation procedure. A firm at its
initial phase of business could follow this business opportunity. In addition to this, a firm can
also adopt this strategy to grow its business rapidly.

BASIC FOUNDATIONAL ECONOMIC CONCEPT5
It is very difficult for a CEO to control all working departments together with all
common goals of a business operation. Hence, a good managerial power is required with strong
economic understanding. By analysing opportunity costs and economic profit and other revenue
related factors, the CEO can take steps to ensure that all departments are performing well to
obtain their common goals.
Answer 5:
Outsourcing has various advantages, which lead a firm to outsource a portion of its
business activities. The chief reason behind this outsource is its cost reduction. Due to high tax
rate, excessive rules and regulations of government and labour costs, it becomes beneficial for a
firm to outsource a part of their production system in another country, where those impacts of
costs are comparatively low (Gunasekaran et al., 2015). The firm can also outsource their
portions of business operation in another domestic firm if it obtains some benefits.
Costs associated with outsourcing are management and coordination, where travel
expenses, employees’ time are included. Other costs include activities related to unplanned
logistics and premium freight. A firm can also incur losses by conducting an inappropriate sales
plan and operational activities. With this significant cost structure, the company can face risks, as
well. Risks may also come in the form of poor product quality as this can decrease the selling of
this company in future.
However, outsourcing also has some advantages. The chief focus of outsourcing is to
focus on the core activities of the partner company (Gunasekaran et al., 2015). This helps the
company to get best quality of business service from those outsourcing companies. This can
reduce the company’s cost structure and increase the opportunity of staffing flexibility and risk

BASIC FOUNDATIONAL ECONOMIC CONCEPT6
management. However, a company should focus on its opportunity cost before taking any
decisions related to outsourcing.

BASIC FOUNDATIONAL ECONOMIC CONCEPT7
Reference:
Eschert, S., Diehl, M., & Ziegler, R. (2017). Gaining Economic Profit or Losing Cultural
Security: Framing Persuasive Arguments for Two Types of Conservatives. Journal of
Social and Political Psychology, 5(1), 8-28.
Gunasekaran, A., Irani, Z., Choy, K. L., Filippi, L., & Papadopoulos, T. (2015). Performance
measures and metrics in outsourcing decisions: A review for research and
applications. International Journal of Production Economics, 161, 153-166.
Kalaitzi, D., Matopoulos, A., Bourlakis, M., & Tate, W. (2018). Supply chain strategies in an era
of natural resource scarcity. International Journal of Operations & Production
Management.
Kim, J. H., & Im, C. C. (2017). The study on the effect and determinants of small-and medium-
sized entities conducting tax avoidance. Journal of Applied Business Research, 33(2),
375.
Pedro-Monzonís, M., Solera, A., Ferrer, J., Estrela, T., & Paredes-Arquiola, J. (2015). A review
of water scarcity and drought indexes in water resources planning and
management. Journal of Hydrology, 527, 482-493.
Szychta, L., & Tymiński, M. (2015). Maximisation of Sales Volume with Respect to the
Company’s Value 3. Logistyka, 62015, 422.
Trinks, P. J., & Scholtens, B. (2017). The opportunity cost of negative screening in socially
responsible investing. Journal of Business Ethics, 140(2), 193-208.