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Concepts of Wealth Generation and Opportunity Costs
After having gone through the two weekly readings, I have gained a basic level of familiarity with the fundamental concepts and terms introduced in the readings. Based on my understanding, I have selected two topics – one each from the two weeks – wealth generation and opportunity costs, which I think are important concepts in managerial economics. I will be discussing them separately. First, I would like to discuss Wealth Generation.
Wealth Generation: Wealth can be defined as a measure of the value of all the assets of worth owned by a person, community, or country. It includes goods such as cars, homes, and bread for which anybody is willing to pay. It also includes any services anybody is willing to hire, such as medical, education, etc. To produce wealth, you have to possess the resources to start an endeavor of some type. Investing is the technique for creating wealth. Wealth is generated via shifting belongings from decreased valued uses to higher
Intelligent investing is the key to constructing wealth. Investing always consists of hazards as the enterprise you invest in should go down in value. It is quintessential to look up the business and analyze the threat earlier than placing your money. The returns you get by investing your money/assets results in compounding the wealth over a period of time. Wealth generation serves a very crucial part in managerial economics because in a business organization wealth creation is attained by adding more value to its outputs than the cost of all resources used to produce those outputs. It is in the hands of the managers to successfully generate wealth even after covering the capital cost. To attain an efficient economy all the assets should be brought to play into their highest-valued uses. The managers should devise ways to put the assets from lowered-valued uses to higher-valued uses in order to create wealth.
The second topic that I found important to be discussed is opportunity cost. Let’s discuss that concept based on my understanding.
Opportunity cost: We can define opportunity cost as the cost of an alternative that must be gone in order to pursue a certain action/opportunity. In other words, it is the benefit received by opting for the alternative action. When the probability cost of a useful resource is referred to by economists, which implies the cost of the subsequent best possible value choice use of that resource. When the opportunity cost is taken into account business then, it can be further classified into two categories: i. Explicit Opportunity cost Explicit costs are out-of-pocket prices for a firm— for example, payments for wages/salaries, rent, hire payments, utilities, raw materials, and other direct costs. It immediately impacts the profitability of the company. ii. Implicit opportunity cost Implicit costs are the chance price of resources already owned by the company and used in business— for example, increasing a factory onto land already owned. I find opportunity cost plays a pivotal role in managerial economics. As in a business organization on daily bases managers have to analyze the situations and take tough decisions based on what they find would be the best for the growth of their organization. Several opportunities come up let’s say a company owns its building. If the company moves, the building could be rented to someone else. The opportunity cost of staying there is the amount of rent the company would get. Considering opportunity costs can guide us to more profitable decision-making. We must assess the relative risk of each option in addition to its potential returns. But, sometimes decisions of opportunity also involve more complexity than just comparing something like two different interest rates on investments. So it serves as a tough decision for the managers to make up decisions after considering all possible alternatives.
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