The Role of Opportunity Cost Pricing

Introduction

Scarcity is a fundamental issue in economics since it decides what to be produced based on limited resources. Every commodity has a cost and therefore to some extent all resources are scarce. The constant opportunity cost used to make economic decisions is essential for the economic growth hence helping to the problem of scarcity. By placing higher prices on the scarce products, the demand for the product is lowered, since it can only be afforded by few people; hence firms develop alternatives (Barnett and Morse 2013). With the scarcity of goods and services in the market, there is a fall in the supply thus rise in the price. As a result, a free market is set hence setting an incentive for the firm to look for alternatives source of the product. Even with such challenges economic development has been identified as the key solution to the challenges posed by scarcity. The existence of finite resources is among the major causes of scarcity in any economy. Scarcity arises from the availability of finite resources such as land, labor, and Capital. These resources determine the production of products based on the desires and the demands of the society. Economic growth influences the taste, choices, and preferences of the products being produced. Therefore, one can argue that economic development, directly compels firms in making decisions on production based on the scarcity forces. Moreover, the concept of choice in the economic growth forms the basis for solving the problem of scarcity; this implies that the choice made might lead to the possible opportunity costs hence determining the production possibilities. Besides, through economic development the scarcity problem is solved and the consumption of goods and services is increased based on alternative and future consumption.

In most instance, scarcity can potentially lead to market failure. For instance, firms might not think about the future until things have ran out of their hands. So, when the goods are scarce, there may not be any practical solutions or alternatives that have been established. In such instances, economic growth provides an alternative for free market where goods are rationed by price; hence people buy certain goods based on their needs, preferences, and tastes (Shah, Shafir and Mullainathan 2015). This implies that economic growth redistributes income, which enables every individual to afford necessities with the best decisions based on the future availability of the resources.

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Economic growth also plays a role in controlling the needs of the society and hence solving the problem of scarcity. By controlling the wants of the society ensures that individuals have fewer needs, hence reducing the scarcity of goods. Reducing the wants is an option for society to deal with scarcity since it provides a long-term solution while addressing the economic needs of a society (Cramton and Ockenfels 2012). Since the resources used for production in society are scared; people have to understand that they cannot have every goods and service, they want. Therefore, they must choose their needs based on necessity while considering others. The individuals, as well as the society, must evaluate the available resources and ensure their choice does not exceed the human wants. Consumers choices have to involve the expected trading value due to economic growth that ensures the opportunity value does not exceed the best alternative since the future consequences are considered.

Economic growth helps in eradicating poverty and fortifying the market. Through economic growth a society can sustain the rise in the production of goods and services. The investment in machinery, as well as new technology helps in raising the standards of living; this is a result of investing in human and physical capital with the developed technological change. Economic growth improves the rise in standards of living. Besides, economic growth motivates the relevant stakeholders as the government, and the private sector to establish institutions that provide the focus for innovation and technological advances. All these facets ultimately leads to reduced poverty with encourage growth as well as increased productivity.

Economic growth defines formal rules that govern how people utilize resources. As a result, the expected and acceptable forms of behavior are established hence fostering economic development with an open market that created wealth hence reduced the scarcity of products. Through entrepreneurship and innovation, there is increased gain from the economic activities hence resolving the scarcity problem (Acemoglu and Wolitzky 2009). As a result of economic growth, there is an expansion of the productivity capacity hence rise in production which leads to solving the problem of scarcity in society.

Forces of economic growth ensure that demand and supply of goods and services are controlled, hence determining the distribution of the resources. Creation of the goods and services ensure a high level of profitability in the society hence rationing the spending of individuals in the market place. With organized production, the problem of scarcity can be resolved, therefore firms are encouraged to adopt efficient methods of production based on the market mechanism (Baumgärtner et al., 2006). Since the lack of money to the consumers leads to the scarcity, the mixed economy ensures the produced goods and services are in the free market segment of the economy. As a result, there is free enterprise in the market, which reduces scarcity in the market based on the economic growth command.

In conclusion, the rise in economic growth is a solution to the problem of scarcity. The free market that controls the price barrier, as well as the illegal market for sale, plays an essential role in solving the problem of scarcity. With planned economies and mixed economies, the problem of scarcity is solved since the allocation of resource is ensured. As a result, there is a stable allocation of resources in all sectors. However, since no economic system is perfect due to human errors, there is a need to look for the best solutions for solving the problem of scarcity.

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References

  • Acemoglu, D. and Wolitzky, A. 2009 The Economics of Labor Coercion, SSRN.
  • Barnett, H. J., and Morse, C. 2013 Scarcity and growth: The economics of natural resource availability, Scarcity, and Growth: The Economics of Natural Resource Availability.
  • Baumgärtner, S. et al. 2006 ‘Relative and absolute scarcity of nature. Assessing the roles of economics and ecology for biodiversity conservation’, Ecological Economics.
  • Cramton, P. and Ockenfels, A. 2012 ‘Economics and Design of Capacity Markets for the Power Sector,' Zeitschrift für Energiewirtschaft.
  • Shah, A. K., Shafir, E., and Mullainathan, S. 2015 ‘Scarcity Frames Value,' Psychological Science

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