Whether it is a business situation or a day-to-day event in somebody’s personal life, there are a large number of economic decision making involved. One can manage many of these decision problems by using simple economic analysis

For example, an industry can source its raw materials from a nearby place or from a far-off place. In this problem, the following factors will affect the decision:

Ø  Price of the raw materia

Ø   Transportation cost of the raw material

Ø   `Availability of the raw material

Ø   Quality of the raw material

Consider the alternative of sourcing raw materials from a nearby place with the following characteristics:

v  The raw material is more costly in the nearby area.

v  The availability of the raw material is not sufficient enough to support the operation of the industry throughout the year.

v  The raw material requires pre-processing before it is used in the production process. This would certainly add cost to the product.

v  The cost of transportation is minimal under this alternative.

On the other hand, consider another alternative of sourcing the raw materials from a far-off place with the following characteristics:

v  The raw material is less costly at the far off place.

v  The cost of transportation is very high.

v  The availability of the raw material at this site is abundant and it can support the plant throughout the year.

v  The  raw  material  from  this  site  does  not  require  any pre processing before using it for production.