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How do scarce resources shape the economic decision process for a firm/company? Can you give an...

How do scarce resources shape the economic decision process for a firm/company? Can you give an example from any particular industry?

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Answer #1

The firm or an industry is considered to be rational and decides how to best allocate the scarce resources to maximize the production of output. Every company has a iso cost line which depicts the total cost of production of the firm including cost of labor and cost of capital and also has an iso quant curve which depicts the combinations of labor and capital that can be employed to produce a particular level of output. The scare resources are allocated at a point where iso quant curve is tangent to iso cost line. This is the cost minimization allocation to allocate the scare resources of the economy.

Given the scare resources the automobile industry decides how to allocate the given labor and capital to produce the given number of cars.

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