Concept of Scarcity and Opportunity Cost - Assignment Example

The problem of allocation of scarcity necessitates the principle of opportunity cost. According to Samuelson and Temin, the opportunity cost of a choice is determined by the next best choice, and for many allocations, opportunity cost is measured by monetary value (Samuelson and Temin, 1976, p.20). Hubbard and Brien write that choices are costly thus the need for an alternative that will incorporate the scarce resources (Hubbard and Brien, 2006, p.8). Choices have both implicit and explicit. Explicit costs are when monetary value is lost i.e. the sacrifice of the choice is paid out in monetary value. On the other hand, implicit costs are costs for which there is no monetary value in the choice made. The principal forfeit in this cost is time.

The opportunity cost will lead to trade in the choices of consumers and a comparative advantage in countries. A trade-off entails a forfeit made to obtain a certain good. The output increases when countries specialize in the goods and services they have an absolute advantage. For example, let us consider UK and country B-producing motor cars and trucks.

Employing all the resources UK can produce 60 million cars and 25 million trucks, while country B can produce 45 million cars and 20 million trucks. It is therefore right to say that the UK has an absolute advantage in producing both goods, but it has a comparative advantage in producing trucks since it is 2 times better at producing them than country B, whereas it is 1.3 times better at producing cars.

The concept of opportunity comes in the production of products by countries. Countries that produce goods using few resources at low opportunity costs have a high comparative advantage in producing those goods. However, comparative advantage ignores costs and assumes there are no diminishing returns (Hubbard, p.101).

A decrease in the price of disposable hospital gowns in the United Kingdom increases demand from DD 1 to DD 2. Supply remains the same in this case.

A change in the price of hospital gowns will increase demand. An increase in demand results in more production as firms tries to meet the increased demand. This result in changes in the equilibrium price (McGraw-Hill, p.58).

Market equilibrium shows the relationship between market demand and market supply. There is competitive and Nash equilibrium. Profit is the variation between revenue and costs. In economics profit denoted as П is the differentiation of marginal revenue and marginal cost, i.e. П = TR-TC. High revenues translate to high profits if the production cost is low. Usually, a company tries to maximize profits subject to costs (Greenwald, p.126).