Organizations aim to achieve their objectives through the effective use of the resources available to them. These objectives may be maximization of sales revenue, profit, capacity utilization, minimization of costs, etc. The effective utilization of resources implies that resources are allocated to strategic alternatives that result in the maximum benefits. However, the allocation of resources to strategic alternatives is not a simple task for an organization as it operates under various constraints. The constraints include limited availability of resources and time and the need to fulfill social obligations, etc.
In operations, the term resources includes manpower, machinery and equipment, capital, materials (raw, semi-finished and finished), spares, components, floor space and other things that are required for production. Operations managers must allocate the resources properly in order to obtain maximum profits within the constraints.
For example, metals like titanium and nickel that are widely used in steel and other industries are now scarce, and their prices have been increasing steadily over the years. An operations manager also faces problems relating to the limited availability of facilities like water and power supply. For all these reasons, an operations manager has to allocate the available resources carefully to the strategic alternatives.
In Economics, scarcity of resources simply means that resources are not unlimited and they also have alternative uses, therefore, allotting a resource for one activity means it cannot be allotted for another use. Thus use of a resource for one purpose has an opportunity cost in terms of the alternative foregone. That is basically why allocation of 'scarce' resources is the fundamental problem of economics.
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