Managerial decision-making draws on economic concepts as well as tools and techniques of analysis provided by decision sciences. The major categories of these tools and techniques are optimization, statistical estimation and forecasting. Most of these methodologies are technical. These methods are briefly explained below to illustrate how tools of decision sciences are used in managerial decision making. 1. Optimization Optimization techniques are probably the most crucial to managerial decision making. Given that alternative courses of action are available, the manager attempts to produce the most optimal decision, consistent with stated managerial objectives. Thus, an optimization problem can be stated as maximizing an objective (called the objective function by mathematicians) subject to specified constraints. In determining the output level consistent with the maximum profit, the firm maximizes profits, constrained by cost and capacity considerations. While a manager does not resolve the optimization problem, he or she may make use of the Continue reading
Economics Basics
Basic Economic Tools in Managerial Economics for Decision Making
Business decision making is essentially a process of selecting the best out of alternative opportunities open to the firm. The steps below put managers analytical ability to test and determine the appropriateness and validity of decisions in the modern business world. Following are the various steps in decision making process: Establish objectives Specify the decision problem Identify the alternatives Evaluate alternatives Select the best alternatives Implement the decision Monitor the performance Modern business conditions are changing so fast and becoming so competitive and complex that personal business sense, intuition and experience alone are not sufficient to make appropriate business decisions. It is in this area of decision making that economic theories and tools of economic analysis contribute a great deal. Basic Economic Tools in Managerial Economics for Decision Making Economic theory offers a variety of concepts and analytical tools which can be of considerable assistance to the managers in his Continue reading
Demand Curve under Different Market Structures
Firm Demand (company demand) denotes the demand for the product/s of a particular firm. While Industry demand means the demand for the product of a particular industry. An industry comprises all the firms or companies producing similar products which are quite close substitutes to each other irrespective of the differences in their brand names. To understand the relation between company and industry demand necessitates an understanding of different market structures. The demand curve of an individual firm is not the same as the industry or market demand curve except in case of monopoly. Monopoly is that market category in which there is only a single seller and therefore there is no difference between a firm and an industry. The firm is itself an industry and therefore the demand curve of the individual firm as well as the industry demand curve under monopoly will be the same and as we shall Continue reading
Three Concepts of Poverty – Economic wellbeing, Capability, and Social Exclusion
Poverty – A Multidimensional Phenomenon Poverty has many faces, and multiple indicators are used to capture the different deprivations experienced by a population. This complex phenomenon is linked to economic wellbeing, capability, and social exclusion. Poverty is a major moral problem because of the suffering it causes and the disadvantages conferred to some population segments. It is defined as a persistent and debilitating social condition attributed to diverse causes that affect a person’s physical, mental, and emotional wellbeing. The complex nature of poverty means that multiple measures are used depending on a country’s priorities. 1. Economic Wellbeing Income and consumption are key quantifiable indicators of poverty in society. These variables measure economic wellbeing and contain absolute, relative, and subjective components. At the basic level is absolute poverty, which describes the lack of necessities needed for survival – shelter, clean water, and food. Here, the quality of survival is an important Continue reading
Expert Opinion Method of Demand Forecasting
In this method of demand forecasting, the firm makes an effort to obtain the opinion of experts who have long standing experience in the field of enquiry related to the product under consideration. If the forecast is based on the opinion of several experts then the approach is called forecasting through the use of panel consensus. Although the panel consensus method usually results in forecasts that embody the collective wisdom of consulted experts, it may be at times unfavorably affected by the force of personality of one or few key individuals. To counter this disadvantage of panel consensus, another approach is developed called the Delphi method. In this method a panel of experts is individually presented a series of questions pertaining to the forecasting problem. Responses acquired from the experts are analyzed by an independent party that will provide the feedback to the panel members. Based on the responses of Continue reading
Different Approaches to Profit in Managerial Economics
Profit is the reward which goes to organization as a factor of production for its participation in the process of production. Profits differ from other factor rewards in the following ways: Profit is a residual income left after the payment of contractual rewards to other factors of production. The entrepreneur while hiring other factors of production enters into contract with them. He pays wages to workers, rent for land and interest for borrowed capital and the residue or whatever is left is his profit. Thus profits become non-contractual in character. The various factors of production are rewarded even before the sale of the product and irrespective of its sales whereas profits accrue only after the product is sold. The rewards of other factors have been fixed. They do not fluctuate whereas profits go on fluctuating so much so that the entrepreneur bears the risk of even incurring losses which we Continue reading