The basic economic problem faced by individuals, businesses, and countries is maximizing profits while minimizing expenses to accomplish sustained revenue with limited resources (Keat et al, 2013). For individuals, the formula is simple: make enough money to pay all the bills and have enough money left over to do what you want to do with it whether that’s investing it or spending it.
Businesses must focus on generating enough revenue to not only pay operating expenses, but to also offer incentives (i.e. benefits) to employees, prepare for expansion, and fund new product initiatives (Keat et al, 2013).
As stated by Alam (2024), managerial economics “aids managers in efficiently allocating limited resources, devising comprehensive strategies, and ensuring their effective execution” (Alam, 2024).
Countries must understand this concept at a much wider level, as businesses that operate within the country, and the individuals that patronize such businesses, all contribute to the overall economic health of that country.
The market process, or the attempt of individuals and businesses to regulate product supply and demand, is one approach to tackle the basic economic problem (Keat et al, 2023). Government intervention to control product supply and demand, materials, resources, prices, etc. is another approach called the command process (Keat et al, 2023).
This codependent relationship between individuals, businesses, and countries ultimately equate to if either experience a profit or a loss. For example, if a business raises their prices and individuals still purchase necessary goods, individual purchasing power decreases. As a result, individuals will seek alternatives, resulting in a profit loss for the business (Keat et al, 2013).
If this scenario spreads across multiple businesses within the same country, the economic stability of that country is threatened.
Considering this, there is a difference between economic profits and accounting profits. Accounting profits deals with the math of income minus expenses equals a surplus or deficit (Keat et al, 2013). It strictly deals with numbers. Economic profits, however, consider opportunity costs (Keat et al, 2023).
Another consideration in economic profits is value-added and non-value-added activities (Dancer et al, 2024). These are activities that can benefit or harm productivity.
In terms of investment decisions, it is important to weigh opportunity costs – or the cost of not investing. For example, let’s say 5 shares of Mars candy company is available. If you had an opportunity to invest at $30 per share for a total of $150, if you choose not to invest, what will that decision look like 6 months from now? A year? If Mars shares rose to $125 per share in 12 months (using simple math, no interest) that decision would cost $475 (125 x 5 = 625 minus $150 initial investment = $475). Small example, but the point is made. There is a cost associated with opportunities.
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