What Are The Key Principles Of Economics In Procurement?
Introduction
Economics is a crucial aspect of procurement that helps organizations achieve their financial goals while ensuring efficiency and effectiveness in the purchasing process. Understanding the key principles of economics in procurement can help businesses make informed decisions, optimize costs, and mitigate risks. In this post, we will explore some essential economic principles that every procurement professional should know to drive value for their organization. So let’s dive into the world of economics and uncover how it shapes the way we approach procurement!
The key principles of economics
1. Economics is the study of how people use resources to produce goods and services.
2. People face trade-offs when they make choices.
3. The cost of something is what you give up to get it.
4. Rational people think at the margin.
5. People respond to incentives.
6. Trade can make everyone better off.
7. Markets are usually a good way to organize economic activity.
8. Governments can sometimes improve market outcomes (for example, by providing public goods or correcting for market failures).
9) A country’s standard of living depends on its ability to produce goods and services efficiently ( productivity ).
How these principles apply to procurement
In order to understand how the key principles of economics apply to procurement, it is important to first understand what these principles are. The three key principles of economics are scarcity, opportunity cost, and marginal utility.
Scarcity refers to the fact that there are limited resources available to meet human needs and wants. This principle is relevant to procurement because it affects the availability of goods and services that can be purchased. Opportunity cost is the opportunity cost is the value of the next best alternative that is given up when a decision is made. This principle is relevant to procurement because it affects the decisions made about what goods and services to purchase. Marginal utility is the additional satisfaction that a person gets from consuming one more unit of a good or service. This principle is relevant to procurement because it affects how much people are willing to pay for goods and services.
By understanding these key principles of economics, we can see how they apply to procurement. The principle of scarcity affects procurement because it limits the availability of goods and services that can be procured. The principle of opportunity cost affects procurement because it causes procuring entities to make trade-offs between different products and services based on their relative costs. The principle of marginal utility affects procurement because it determines how much people are willing to pay for goods and services, which in turn affects what types of products and services are procured.
Conclusion
Economics in procurement is an important concept to understand, as it can help you make informed decisions when it comes to purchasing goods and services. The key principles of economics in procurement include understanding supply and demand, assessing the total cost of ownership, taking into account external factors like taxes and regulations, assessing risk levels, and doing due diligence on suppliers. By mastering these basic concepts, businesses can be sure that they are making smart financial decisions when it comes to procuring goods or services.