Microeconomic Tools: Cost-Benefit Analysis

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Microeconomic Tools: Cost-Benefit Analysis

Introduction

Microeconomics is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources typically in markets where goods and services are being bought and sold. It examines how this decision behavior affects the supply and demand for goods and services, which determine prices, in turn, determine the supply and demand of goods and services. Scarcity refers to the condition where human wants and needs exceed production possibilities. Cost-benefit analysis (CBA) is an economic tool to aid social decision-making and is mostly used by the government and private sector to evaluate the desirability of a given intervention in markets. Incentives in economics are any factor that provides a motive for a particular course of action or counts as a reason for preferring one choice to alternatives.

Discussion

According to modern economics, scarcity exists whenever there is an opportunity cost that is when a meaningful choice is made. Scarcity implies that not all of societys goals can be fully attained at the same time, so trade-offs are made of one good against others. Though critics have been raised by some people who question this concept of scarcity because it assumes human wants are unlimited. Though these unlimited wants may result in more from culture, than human nature for example individuals may be influenced to want more by peer pressure, adverts on media or billboards, or by a desire to show off. They might see consumption as a means of coping with unfulfillment. The problem of scarcity seems less relevant to basic needs like water, food, shelter, clothing, and health care.

The cost-benefit analysis aims to gauge the efficiency of interference comparative to the status quo. The process involves the monetary value of initial and ongoing expenses against expected returns. For example, a production manager may compare manufacturing and marketing expenses to project sales for a proposed good, and only decide to produce it if he expects the revenues to rise in due course.

Cost-benefit calculations involve using the time value of money usually done by converting the future projected streams of costs and profit to a present value amount.CBA has been criticized on different grounds, for example, it comes from determining which costs should be included in analysis. This is controversial as organizations or interest groups may feel that some costs should be included or excluded from a study.

Economics in the modern world is mostly concerned with remunerative incentives, rather than moral or coercive incentives this is because remunerative incentives are the main form of incentives in the business world. Economics theory predicts that the market will tend to move towards the equilibrium price because everyone in the market has a remunerative incentive to do so by cutting prices formerly set above equilibrium a firm can attract more customers and make more money., by raising a price formerly set below the equilibrium a customer is more able to obtain the good or service that s/he wants in the quantity s/he desires.

While competition among firms has often beneficial results, lowering prices and encouraging innovation, competition within firms has almost uniformly negative results. Designed to encourage production, extreme incentives schemes create a cut-throat working environment where office politics dominate and overshadow the productive goal of the company.

Reference

Armstrong, Michael (2000). Principles of Microeconomic.CIPD House.

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