Table of Contents
Economic analysis is the systematic approach use for determining scarce resources optimum usage which involves weighing of two or more different alternatives for achieving a particular objective under a set of constraints and assumptions. Even economic analysis considers employed resources’ opportunity cost. It also helps to measure social and private benefits as well as costs in monetary costs. In this paper, the organisation chosen is Toyota Motor Corporation. The rationale for choosing this organisation is its vast production unit. Furthermore, it is important to understand that before initiating production understanding demand of the market in order to allocate various resources judiciously is important. The paper has been elucidated from managerial economic perspectives. Other things being discussed in this study are how business decisions are made based on the economic analysis pertaining to scarce resources of the organisation. However, scarcity of resources depends upon the location of production and labour charges. On the contrary, scarcity of capital is seldom faced by big giants of the world. As a result, it is important to understand that mostly labour related scarcity is only faced by automobile companies like Toyota while hiring skilled and unskilled labours in new location plants.
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Scarce of resources and decision making by the managers
Scarcity leads to choices regarding products and services by governments, businesses and consumers as well. For instance, millions of people travel from one place to another each and every day where they have to choose between modes of travel. Economic models based on scarcity and resources allocation help the managers in decision making process and choosing the best option. Almost each one dwelling in the society have to go through economic decision making at one or the other point of life; right from a billionaire to a small supplier (Mankins, Brahm and Caimi, 2014). For instance, billionaire investors have to decide whether he will invest in mutual funds or equities. Scarce resources are utilised and accessed by the managers of any organisation sparingly in order to generate adequate profits and revenues. Other economic variables considered by the managers are product type, profit maximisation prices and optimum production. For example, a company operating in the manufacturing sector will need to choose between different products. Additional features and type of product is likely to boost sales as well as utility of the product. On the other hand, managers must apply production analysis, risk analysis and capital budgeting techniques.
Economic decisions and scarce resources
Decision making is a strike balance between complications in handling and simplification of analysis. There are various functional areas at the firm level such as marketing, finance, production, personal, etc. Decisions that are made using economic analysis help to integrate platform of one functional area with another. As a result, decisions are thus not made in watertight compartments rather integrated perspective is taken into consideration. Moreover, whenever any product is launched both economic and social welfare should be taken into account. Social obligations sometimes act as constraints as well. Any business organisation possesses different resources including land, capital and labour. Best alternative is thus selected and employed in the most efficient manner possible to achieve the desired result (EconomicsDiscussion.net, 2016). Resources related decision once taken pricing; materials and production plans are formulated for implementing the same. As a result, this is the way how both forward planning and decision making goes hand –in-hand. Business executives hardly possess any information related to costs, profits and future sales. As a result, past data must be considered and approximations are being forecasted. On the other hand, cost, demand, production and pricing are all included in economic theories. Internal environment phenomenally gets addressed when managerial economics is considered. Profit and sales are two most important aspects that are considered in managerial economics in respect to business decision making. Inventory polices and production related decisions are also taken in case of managerial economics. Production efficiency is increased when the managers can appropriately do production analysis. Successful forecasts are thus sought in order to minimise various risks involved. Thus, cash availability is an important concern in respect to businesses which can be better detected with various economic models. Project and process choices determine how much investment is required while economic feasibility is dissected via different production lines. Demand forecasting is also crucial in businesses in order to understand how much quantity products must be manufactured. It is also related to inventory as well. The process of demand forecasting therefore entails estimation of appropriate production quantity (Gardent and Reeves, 2009). Before all the production activities are carried out, sales forecasting is also substantial. Excess of inventory is detrimental for any business, especially when there is lack of demand in the market. Demand analysis thus encompasses value judgements and deep involvement in regards to demand determinants. Whether the market competition is likely to decrease or increase, managers of the organisations are able to assess demand prospects and social behaviour via economic analysis application which mostly result in the reduction or expansion of sales of various business products.
The matter of opportunity cost crops up when mutually exclusive choices come to forefront. As a result, when any mutually exclusive choices have to be taken opportunity cost analysis is required. In production units of Toyota also similar situation can be faced while selecting between two feasible projects. When any organisation possesses limited resources such as man power, skills, money and time, those things can be thus utilised for only a handful of exercises or projects. Therefore, project decision can help in maximisation of the company’s wealth. Sometimes other adverse situations may also arise where a project gets chosen for its profitability and feasibility but the same cannot be carried out due to different reasons; one of such reasons is lack of required resources (Local Government Association, 2017). At times, companies like Toyota can also overlook opportunity cost largely. It can be better understood via an example. For instance, when any student takes admission in college or school, he or she must also calculate the cost of books, housing and tuition fees. There are other opportunity costs as well which the organisation tends to ignore. Significant value is definitely there for opportunity cost but specific monetary value remains missing. As a result, decision makers of the company are responsible to determine the opportunity cost subjectively. Till the time resource scarcity is present, opportunity cost will also exist. Therefore, whenever the managers of Toyota choose amongst various production possibilities next best alternative’s value must always be ascertained by calculating capital cost and comparative advantage analysis.
Use of various economic analyses in order to make different business decisions
Even in economic analyses various environmental factor are considered as well such as demographics, technological factors, cultural factors and competition. However, the degree dissecting the above mentioned aspects is less compared to that of economic factors.
There are mainly four steps for market forecast that the Toyota does first; these steps include defining the market, total industry demand dissection, drives of demand forecasting and sensitivity analysis conduct. Understanding the drivers of demand is extremely important where various statistical techniques and regressions are used to determine historical demand. However, it is important to look beyond the data provided so that resources can be allocated judiciously.
Techniques used for production in automobile industry also determine how the prices will be set and resources will be allocated. For instance, wage is labour service’s price whereas rent is paid for availing land services. Toyota aims to utilise efficient productive processes as much as possible (Toyota Motor Corporation, 2017). All the expensive factor services are utilised in smaller quantities compared to that of cheap resources. In fact, cost of production can be reduced when substitute and cheaper resources are opted for. Capital intensive process of production process is adapted by Toyota when labour is comparatively higher in price than the capital. As a result, it can be witnessed when the company produces in nations like United Kingdom and Unites States. On the other hand, in underdeveloped and developing nations labour cost is comparatively less which indicates that labour intensive production method will be adopted by the company. Another problem while allocating resources is disruptive distribution of income. Moreover, in most cases resources cannot be utilised to the fullest by the companies. Several costs are considered while resources allocation is considered. These include opportunity cost, accounting cost, economic cost and others.
Economic cost comprise of account costs alongside. Various components pertaining to economic cost are variable cost, total cost, average cost, fixed cost and marginal cost. In theory, economic cost is the summation of opportunity and accounting cost.
From the above paper it can be inferred that a wide range for alternative action courses are considered whenever the managers of Toyota takes decision regarding any project. The alternatives comprise of manufacturing method change, continue manufacturing in the present scenario or opt for sub-contracting the entire project or work to any efficient third party. Furthermore, it can be witnessed that Toyota faces scarcity while operating in foreign land other than its domestic production plant because of lack of required skilled and unskilled labours.
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- Toyota Motor Corporation. 2017. Facilities. [Online] Available at: <http://www.toyota-global.com/company/profile/facilities/> [Accessed 14 March 2017].