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The Goals and Decisions of Organisations

Resources available to organizations are very limited compared to their wants. When making decisions based on scarce resources, proper evaluations of alternatives should be done before selecting the option that maximizes stakeholders wealth. In this evaluation, special reference should be made in the quest for profit alongside an analysis of the cost structure of firms. The role of stakeholders paying particular attention to shareholders should be considered here as well. 1.1 Scarcity Scarcity is an important economic concept, as people have unlimited wants and needs, while the resources required fulfilling them are finite. Therefore, decisions have to be taken to determine how these finite resources should be allocated to satisfy varying needs and wants. 1.1.1 Scarcity and product prices Competing ends for the same resources lead to an economic problem. When a choice is made, the value of the foregone alternative is known as the opportunity cost. Scarcity prompts to price any product and service. Usually, production cost is used to determine the basic price. Production requires the usage of scarce resources that are expensive. Accountants view cost of production as per the actual amount paid and economists view cost of production based on opportunity cost. Unlimited wants and needs

Human beings have unlimited needs and wants. This is because humans are always trying to further improve their standard of living. Look at the example for a clear understanding. Example-Unlimited wants and needs A low level employee working in an organisation may have the following unlimited needs and wants: First, he has basic needs which include food, shelter, clothes and safety through his salary and other benefits. Once he fulfils the above basic needs, he may want a private vehicle or a job with better designation. After he reaches that point, he may require a luxurious house or a vehicle with security. Even after the self satisfaction needs are fulfilled, he may still want a private jet or he might want to explore space and visit the moon for vacation!

Limited resources Resources are limited. They are available in fixed amounts whereas needs and wants can grow at an unmanageable speed, which gives rise to scarcity. It applies to all economic resources. Example-Limited resources If an employee receives a daily wage of 50, the salary then becomes his scarce resource to fulfil all his needs and wants. This would lead him to choose the needs or wants to be fulfilled with the limited money he receives. Choice Choice arises because of unlimited wants and limited resources. Every human is faced with choices in daily life. This is because we do not have all the resources to satisfy all our wants, and thus we have to choose what we want the most. Example-Choice If a CIMA qualified Management Accountant gets job offers from two different organisations, he is faced with a choice. He will not be able to accept both offers, as his time is a limited resource. He has to choose the job, which he best likes resulting in an economic choice.

Opportunity cost When there is a choice, people have to inevitably give up one to get another. Opportunity cost is the forgoing of an opportunity. It is defined as the value of the forgone or next best choice. Opportunity cost plays a key role in determining many business decisions.

Example - Opportunity cost An entrepreneur decides to use his own building as office space for his start up business. By making this decision, he forgoes the opportunity to rent out his building and earn an additional income. The rent income he could have earned will thus become the opportunity cost of the decision to employ the building in the business. Activity- Opportunity cost Kevin has earned 200 during the summer holidays. He is contemplating on buying a new Xbox as well as well upgrades his wardrobe with some new clothes and shoes. However, he does not have the funds to satisfy both wants. If he decided to buy the Xbox, what is the opportunity cost of this choice? Answer The cost of upgrading his wardrobe will be the opportunity cost of buying the Xbox. This is because it is the second best alterative/option (benefit forgone) he had in his mind to use his income. 1.1.2 Production decisions Economies suffer from scare resources and unlimited needs or wants. Hence, it is essential to select the best alternative to maximize their gains. As a result, every economy is faced with several key economic problems. The decisions may differ but the problems are the same for all economies. These problems arise when economies try to operate under the condition of scarcity. Economies can be classified according to the type of solution they provide for these problems. For whom to produce? The answer to this question is often determined by the political system. It involves a decision between providing equal benefits to all citizens or to provide benefits based on profits. A market economy will produce for people who can pay the highest price whereas in society centered economies, production will be for the needy. Example- For whom to produce? In a free market such as the USA, production will be intended towards those who can purchase the products. In command economies such as Cuba, production will be determined via central planning to benefit all citizens equally. What to produce? The answer to this question depends on the political and economic orientation of a country. In a capitalist economy, more focus will be on the production of luxurious and expensive products as opposed to basic merit goods. Therefore, it can be said that a market economy acts with a profit motive whereas a society centered political system would produce basic merit goods. Example-What to produce? A capitalist economy will allocate its resources to the most profitable products such as luxury services. However, a command economy will give priority to produce more basic goods, which are needed by the society such as education and healthcare. 3

How to produce? This involves a decision on the composition of resources to be used in terms of land, labour, enterprise and capital. The composition would be determined to arrive at the lowest cost of production while producing the maximum output. However, the decision will also be based on the relative availability of resources. Example- How to produce? A profit-oriented economy might use capital in place of labour as it lowers the unit cost. However, most countries might wish to employ labour in place of capital when there is an issue of unemployment to ensure the financial stability of its citizens.

How to distribute? Once the goods are produced, they will need to be shared. In a free market, goods are distributed to those who can afford them based on price. In a command economy, governments intervene and set a price to ensure a fair share is given to everyone. Example: How to distribute? In free market economies, price determines distribution as people who can afford to pay for a product will get it. In controlled economies, the government will dictate prices by imposing minimum/maximum price levels.