Scarcity and Decision Making

Robbins has defined Economics as "the science that studies human behaviour as a relationship between ends and scarce means which have alternative uses". Human wants are virtually unlimited and non-satiable, but the means to satisfy them are limited.

Managerial Economics hence has evolved as a discipline of choice making. But why does scarcity arise? A resource is scarce if demand for it exceeds its supply. Scarcity is, therefore, a relative term. Anything that commands a price is a scarce item, called economic good, and the rest are free goods. Any item whim is a free good today in a particular society may "become an economic good tomorrow. Thus, scarcity can be defined as a condition in which resources are not available in adequate amounts to satisfy all the needs and wants of a specified group of-people. The problem of scarcity, and thereby, choice would not have arisen if resources of production had been in abundance. A choice has to be made between ends (unlimited wants) and means (limited resources). Due to scarcity of resources, we have to constantly match the ends and means. 

A firm has to allocate the available resources among various activities of the unit. Resource constraints can be in form of limited supply of men, materials, machines, money and managerial ability. Following examples illustrate this point:

1.       Production manager of Asian Paints may face a choice making decision of producing paints for domestic or industrial use, due to 'scarcity of titanium dioxide.

2.       Marketing manager of Maruti Udyog has to decide whether to push up sales of Alto or Wagon R or Gypsy in view of limited advertisement outlay.

3.       Personnel manager of Titan Watches- has- to decide whether to employ skilled labour on a contract basis or to hire them on daily wages.

4.       The finance manager of a hospital-may face the problem of allocation of limited budget between paediatric, surgery and orthopaedics departments.

5.       A management institute may strive to maximise the value of teaching and rsearch outputs subject to an annual budget constraint.

6.       The technological constraints may set the physical limits on the amount of output per unit of time that can be generated by a particular machine, or workers employed by production manager of Videocon Intl.

The objective in all the cases has been to maximise the attainment of ends given - the means and the priorities. How to maximise the output level or to minimize the use of resources thereby the cost of production, is regarded as the optimal solution to economic problem.

Besides resource constraints, the firm faces legal constraints. They include an array of central, state and local laws. These take the form of minimum wage laws, health and safety standards, pollution emission standards, as well as regulations that prevent fir-ms from employing unfair trade practices. Society may impose moral constraints on firms to modify their behaviour to function consistently with broad social welfare goals. For instance, a community in a particular region may ban the operations of a liquor factory.

From the above analysis, it can be concluded that the essence of economic science is determination of optimal behaviour which is subject to constraints arising basically due to scarcity of resources. Constraints are so pervasive and important that economists use the term "constrained optimisation" synonymous to maximisation. Thus, the primary role of managerial economics is in evaluating the implications of the alternative courses of action and choosing the best or optimal course of action among several alternatives. As a result, the decision making process involves the following steps:

Step1: Establish the objectives - Identification of objective of the organisation is necessary to make a decision. Unless one knows what is to be achieved, there is no sensible way to make a decision.

Step 2: Define the problem - Specification of the problem is a crucial part of decision­ making. The problem may arise due to firm's planning process or may be prompted by new opportunities.  

Step 3: Identification of alternatives - Once the problem is defined possible courses of action should be identified. After addressing the question, "What do we want?" it is natural- to ask "What are our options?" The decision maker should identify the variables under his control and the constraints that limit his choice.

Step 4: Selection of best alternative - Having identified the set of alternative possible solutions, revenues and costs associated with each course of action should be stated. Then the best possible alternative should be selected, given the goals of the firm.

Step 5: Implement the decision - Once an alternative is chosen, it must be implemented in order to be effective. Even organisations as disciplined as armies, find it difficult to carry out orders effectively.

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