The Economic Problem

The Economic Problem

Below is the first paper

The economic problems that all persons, businesses and countries face are resources are scarce, however people want unlimited resources. The differences in the way a market process verses a command process attempt to deal with the basic economic problem is either through a market process, an unplanned not organized by any central authority but is controlled by the supply and demand of goods and services (Investopedia, 2014). On the other hand, the command process is organized by the government who has ownership and directs the factors of production such as land, capital and resources (Investopedia, 2014). Moreover, the difference is between division of labor and the factors determining prices. Economic profits are determined by economic principles not generally accepted accounting principles (GAAP) and costs are deducted from revenues. Economic profits use implicit costs, considered opportunity cost are usually the company’s own resources such as company-owned buildings, equipment and self-employment resources. Economic profit is used to see the value of the company for example, the performance metric. Unlike the accounting profit, that uses gains and losses and is calculated through GAAP. The accounting profits are a company’s total revenue reduced by the explicit costs of producing goods and services (Investopedia, 2015). The explicit costs are direct monetary movement and expenses such as the cost of raw materials, employee wages, transportation, rent and interest on capital (Investopedia, 2015). The accounting profits has a limit to time periods such a fiscal quarter or year. It is mainly used for income tax purposes, financial statement preparations and financial performances. For example, the importance of taking into account the opportunity costs in investing decisions is if a company had $150,000 in revenues and $50,000 in explicit costs, the accounting profit would be $100,000. The same company has $25,000 in implicit or opportunity costs; its economic profit would be $75,000 (Investopedia, 2015).

References

What is the difference between market economy and a command economy? (2014,

October) Retrieved January 9, 2017, from http://www.investopedia.com/ask/answers/100314/wha…

What is the difference between economic profit and accounting

profit? (2015, March) Retrieved January 9, 2017, from http://www.investopedia.com/ask/answers/033015/wha…

7 hours ago

the second paper

The basic economic problems that all persons, businesses and countries face is scarcity. Scarcity is viewed by economics as the study of sharing out of limited resources to meet unlimited human wants (Peach & Dugger, 2006). Thus, resources are not available to satisfy all the needs and wants of people, businesses, and countries. Therefore, scarce resources are available for use based on demand and affordability. Some scarce resources are available more in one country versus another. Water is a great example of a scarce resource. For us in the United States, its abundant; however, in other parts of the World like some places in Africa, it is scarce and not available and or affordable to all (Keat, Young, & Erfle, 2013).

The differences in the way a market process versus a command process attempt to deal with basic economic problem is that one is controlled by government or some central authority and the other is based on the use of supply, demand, and affordability. Command process is influenced by government agencies, laws and regulations, and resources available. It is the use of central planning and directives of government entities to answer the questions of what, how, and for whom; whereas, market process determines what goods and services should be produced and how much, how should the goods and services be made, and for whom should these be made for. Thus, a country must make these decisions based on their scarce resources available (Keat, Young, & Erfle, 2013).

Hence, the difference between economic profits and accounting profits. Economic profit differs from accounting profit in that economic profit equals the current value of unobservable forthcoming cash flows; whereas, accounting profit generally equals the difference between observable revenues and observable expenses. Economic profit is difficult to measure as it is impossible to measure future cash flows with precision (Ketz, 2003). So, the importance of considering the opportunity cost also knows as implicit costs in investment decision is vital. A company must decide what it is willing to pay and invest to keep its resources from going elsewhere. Therefore, an example of implicit cost is the time and money spent by investors to securely and effectively operate a profitable business (Keat, Young, & Erfle, 2013).

Resources

Keat, P.G., Young, P. K.Y., & Erfle, S. E. (2013). Managerial Economics: Economic Tools for Today’s Decision Makers (7th ed.). Upper Saddle River, New Jersey.

Ketz, J. E. (2003). The objectives of financial reporting. Accounting Today, 17(12), 8. Retrieved from http://search.proquest.com/docview/234481939?accou…

Peach, J., & Dugger, W. M. (2006). An intellectual history of abundance. Journal of Economic Issues, 40(3), 693-706. Retrieved from http://search.proquest.com/docview/208850071?accou…

Answer Preview

I agree that the fundamental economic difficulty facing every individual, nation, as well as commercial enterprise is scarcity of resources. This is because most individuals prefer the availability of infinite resources. The distinction of the approach of a market process from the…

(458 Words)

 

Scroll to Top