Elementary Economic Analysis
Whether it is a business situation or a day-to-day event in somebody’s personal life, there are a large number of economic decision making involved. One can manage many of these decision problems by using simple economic analysis.
For example, an industry can source its raw materials from a nearby place or from a far-off place. In this problem, the following factors will affect the decision:
ü Price of the raw material
ü Transportation cost of the raw material
ü `Availability of the raw material
ü Quality of the raw material
Consider the alternative of sourcing raw materials from a nearby place with the following characteristics:
ü The raw material is more costly in the nearby area.
ü The availability of the raw material is not sufficient enough to support the operation of the industry throughout the year.
ü The raw material requires pre-processing before it is used in the production process. This would certainly add cost to the product.
ü The cost of transportation is minimal under this alternative.
On the other hand, consider another alternative of sourcing the raw materials from a far-off place with the following characteristics:
ü The raw material is less costly at the far off place.
ü The cost of transportation is very high.
ü The availability of the raw material at this site is abundant and it can support the plant throughout the year.
ü The raw material from this site does not require any pre processing before using it for production.