Critical Decisions Must Be Made - Essay Example

The scarcity of resources holds it that one choice will outperform the others, not because the other alternatives are not important but because choices have to be made among the alternatives (Gerber, 2010). Resources are never enough to satisfy human needs and wants, and the concept of opportunity cost, therefore, informs choices among alternative use of resources.

Individuals, firms, and governments face opportunity costs from time to time in their efforts to allocate resources for the most suitable purpose (Keat & Young, 2006). At an individual level, one may want to pay for the mortgage and buy a car given a certain level of resources available. While both the car and mortgage are equally important to the individual, the individual may forego the car and make the mortgage payment. The individual pays for the mortgage at the expense of the car. The car is the next-best alternative given up when the individual pays for the mortgage.

 In a firm’s context, the firm may want to maximize shareholders’ wealth and at the same time retain significant profits for firm operations. If the firm chooses to maximize shareholders’ wealth at the expense of retaining more profits for the firm, more profits become the foregone item (Douma & Schreuder, 2008). In the choice made in this case, the next-best alternative is shareholder wealth maximization. Governments also face opportunity costs. A government may want to finance a healthcare project but it also needs to acquire more military equipment using the same resources.