Module 3
Economic decisions in
Entrepreneurship
1. SCARCITY
Determining how to make the best use of scarce resources is fundamental to
economics. The factors of production are not limitless, i.e., there is scarcity. Therefore,
we must make choices about how best to use them. This is where economics comes in.
Factors of production are Land, Labor, Capital, and Enterprise.
What is Scarcity?
Scarcity, in economics, refers to limitations. Specifically limitation of supplies, raw
materials, components, and goods. We use the term scarcity when contrasting limited
availability with unlimited human wants.
In the world of economics, we have to learn to live with one basic problem: The gap
between scarcities, i.e., limited resources, and unlimited wants.
In order to satisfy those wants, suppliers need to determine how to use those limited
resources carefully. If there were no scarcity, there would be no economics. Imagine a
world with no scarcity, i.e., a land of plenty. Imagine that everything was limitless,
even time, metals, minerals, raw materials, and honey. In a world with no scarcity,
economists would have nothing to study. Nobody would have to think carefully about
how to allocate resources.
Physical and Economic water scarcity
When there is physical water scarcity, there is not enough water to meet the demands
of a region or country so that the ecosystem can function properly. Economic water
scarcity exists when the water infrastructure is poor.
2. Choice
Choice refers to the ability of a consumer or producer to decide which good, service,
or resource to purchase or provide from a range of possible options.
Principles
People allocate their limited resources to satisfy their unlimited wants Because of
limited resources, economic agents (individuals/households and firms)
These choices are made according to the following four principles:
, Self-interest motive: Economists assume that individuals pursue their own
self-interest and are primarily concerned with their own welfare.
Profit maximization: firms and producers supply consumers to maximize their
own profit.
Opportunity Cost: the cost of any activity measured in terms of the best
alternative activity that is forgone. That is, it is the cost of not choosing the best
possible alternatives. Policy-makers must keep in mind the opportunity cost of
alternatives.
Utility Maximization: Economists assume that whenever you make an
economic choice, you are trying to maximize your own utility. The utility is
subjective and differs for each individual and therefore it is difficult to quantify.
It is not measured in practice.
Free goods: are abundant (their production does not involve an opportunity cost)
Economic good: goods that are scarce.
3. TRADE-OFF
The term “trade-off” is employed in economics to refer to the fact that budgeting
inevitably involves sacrificing some of X to get more of Y. With a fixed amount of
savings, one can buy a car or take an expensive vacation, but not both. The car can be
“traded off” for the vacation or vice versa.
A trade study or trade-off study, also known as a figure of merit analysis or a factor of
merit analysis, is the activity of a multidisciplinary team to identify the most balanced
technical solutions among a set of proposed viable solutions.
In economics, a trade-off is defined as an "opportunity cost". For example, you might
take a day off work to go to a concert, gaining the opportunity of seeing your favorite
band, while losing a day's wages as the cost of that opportunity.
Trade-offs create opportunity costs, one of the most important concepts in economics.
Whenever you make a trade-off, the thing that you do not choose is your opportunity
cost.
The definition of trade-off is an exchange where you give up one thing in order to get
something else that you also desire. An example of a trade-off is when you have to put
up with a half-hour commute in order to make more money.
It is often stated that a trade‐off occurs when a cost increase in one field is over‐
compensated by a cost reduction in another field, resulting in an overall improved
situation. Economic Trade‐offs (ETOs) are calculations intended to support decision-
Economic decisions in
Entrepreneurship
1. SCARCITY
Determining how to make the best use of scarce resources is fundamental to
economics. The factors of production are not limitless, i.e., there is scarcity. Therefore,
we must make choices about how best to use them. This is where economics comes in.
Factors of production are Land, Labor, Capital, and Enterprise.
What is Scarcity?
Scarcity, in economics, refers to limitations. Specifically limitation of supplies, raw
materials, components, and goods. We use the term scarcity when contrasting limited
availability with unlimited human wants.
In the world of economics, we have to learn to live with one basic problem: The gap
between scarcities, i.e., limited resources, and unlimited wants.
In order to satisfy those wants, suppliers need to determine how to use those limited
resources carefully. If there were no scarcity, there would be no economics. Imagine a
world with no scarcity, i.e., a land of plenty. Imagine that everything was limitless,
even time, metals, minerals, raw materials, and honey. In a world with no scarcity,
economists would have nothing to study. Nobody would have to think carefully about
how to allocate resources.
Physical and Economic water scarcity
When there is physical water scarcity, there is not enough water to meet the demands
of a region or country so that the ecosystem can function properly. Economic water
scarcity exists when the water infrastructure is poor.
2. Choice
Choice refers to the ability of a consumer or producer to decide which good, service,
or resource to purchase or provide from a range of possible options.
Principles
People allocate their limited resources to satisfy their unlimited wants Because of
limited resources, economic agents (individuals/households and firms)
These choices are made according to the following four principles:
, Self-interest motive: Economists assume that individuals pursue their own
self-interest and are primarily concerned with their own welfare.
Profit maximization: firms and producers supply consumers to maximize their
own profit.
Opportunity Cost: the cost of any activity measured in terms of the best
alternative activity that is forgone. That is, it is the cost of not choosing the best
possible alternatives. Policy-makers must keep in mind the opportunity cost of
alternatives.
Utility Maximization: Economists assume that whenever you make an
economic choice, you are trying to maximize your own utility. The utility is
subjective and differs for each individual and therefore it is difficult to quantify.
It is not measured in practice.
Free goods: are abundant (their production does not involve an opportunity cost)
Economic good: goods that are scarce.
3. TRADE-OFF
The term “trade-off” is employed in economics to refer to the fact that budgeting
inevitably involves sacrificing some of X to get more of Y. With a fixed amount of
savings, one can buy a car or take an expensive vacation, but not both. The car can be
“traded off” for the vacation or vice versa.
A trade study or trade-off study, also known as a figure of merit analysis or a factor of
merit analysis, is the activity of a multidisciplinary team to identify the most balanced
technical solutions among a set of proposed viable solutions.
In economics, a trade-off is defined as an "opportunity cost". For example, you might
take a day off work to go to a concert, gaining the opportunity of seeing your favorite
band, while losing a day's wages as the cost of that opportunity.
Trade-offs create opportunity costs, one of the most important concepts in economics.
Whenever you make a trade-off, the thing that you do not choose is your opportunity
cost.
The definition of trade-off is an exchange where you give up one thing in order to get
something else that you also desire. An example of a trade-off is when you have to put
up with a half-hour commute in order to make more money.
It is often stated that a trade‐off occurs when a cost increase in one field is over‐
compensated by a cost reduction in another field, resulting in an overall improved
situation. Economic Trade‐offs (ETOs) are calculations intended to support decision-
