I have begun to read the ‘Principles of Business Economics’ by Joseph G. Nellis and David Parker for my Executive MBA Course at University of the West of England, or UWE for short. And in an attempt to get this into my brain, i am going to try and condense some of this into Blog format. If this is not useful for you, please excuse me, or alternatively if this is useful and you have other comments or links please let me know.
This is is process by which business managers decide:
– what goods and services to produce.
– how to combine available resources to provide goods and services.
– and for whom these goods and services are supplied.
One of the major determinants on this what, how and who concept is the “Price Mechanism’.
‘Vertical Integration’ is the basis for deciding at what point the company/business begins and where the market begins. For example, to decide whether or not to undertake the Public Relations for a particular business or product in-house or to employ the market to do this for you. A business manager will be looking at both the Transaction Costs of buying in this service from the outside market and also the Opportunity Cost that will result by allocating resources to providing this in-house.
Transaction Cost – this is the cost incurred when buying in market skills.
Opportunity Cost – this is what is ‘given up’ when we decide to persue a particular choice
As business managers we can look at the Production Possibility Curve to make decisions like this, regarding both new products and services that we may look to perform in-house.
This model offers a tool to understand what we will loose (the Opportunity Cost) should we choose to pursue another business aim. For example, if a company is producing only colour printers and wishes to enter the personal computer market it must decide what effect the manufacture of personal computers will have on the production of the colour printers. In this model below, OB represents the current manufacturing level of colour printers. If the company where to decide to make OC personal computers then the new production rate for colour printers would be OD. And furthermore, if the company where to make OG personal computers then it would be producing OH printers. However, what we have to be aware of are ‘Diminishing Marginal Returns’. Please note that this Production Possibility Curve only results when all the current resources of the business are at maximum.
It must be noted, and understood when looking to make these production decisions (or simply the allocation of resources) that as we apply more of one input (e.g. labour) to another input (e.g. capital or land) that after some point the resulting increase in output becomes smaller and smaller. This is known as Diminishing Marginal Returns.
Therefore to increase the production possibility of the business without decreasing the output seen in the other areas (in this particular case of colour printers), more resources are required.