Question

What principle do you think underlies Li & Fung’s decisions on how to allocate production of a good's inputs and its final assembly among various countries?

Short answer

The principle of ‘opportunity cost’ underlies Li and Fung’s decision.

Step-by-step solution

Meaning of ‘opportunity cost’

A producer or firm can utilize a resource or a set of resources for different alternatives of production or business. When a producer or businessman decides to choose one option out of many, it forgoes the benefits of other alternatives. The loss to the producer or businessman is the opportunity cost for opting for one alternative over other possible options.

Principle behind Li and fung decisions 

The economic decision by a producer or businessman is based on the opportunity cost associated with it. The selection of the alternative whose opportunity cost is lower would be the best choice. The economic principle reduces the cost of production and helps the producer or businessman to allocate resources more efficiently.

The rapid economic growth of Hong Kong increased the cost of resources available in that country. Thus, the opportunity cost for using these resources also increased. But in many parts of the world, the opportunity cost for required inputs was lower than that in Hong Kong. Li & Fung decided to allocate required inputs and final assemble them from different parts of the world because it reduces their opportunity cost of business.

Thus, the company's principle behind their economic decision is the principle of ‘opportunity cost.’