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Decision making


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Decision making

  1. 1. UNIT -1 BASICS OF MANAGERIAL ECONOMICS LESSON – 2 CONCEPTS OF ECONOMICS IN DECISION MAKINGWhat do you mean by decision making? Well decision making is not something which is related tomanagers only or which is related to corporate world, but it is somethingwhich is related to everybody’s life. Whether a person is working or nonworking, irrespective of his/her field decision making is important toeveryone.You need to make decision irrespective of the work you are doing.As a student also you have to take so many decisions.Suppose at a particular point of time you want to go for a movie, and atthe same point of you want to go for shopping then what you will do.You can’t do two things at the same point of time. You have to decidewhat to first and what to do next.Therefore decision making can be called as choosing the right optionfrom the given one. To decide is to choose. Whether to do this or to dothat is what decision making.Meaning of decision making: Decision making is the most important functionof business managers. Decision making is the central objective ofManagerial Economics.Decision making may be defined as the process of selecting thesuitable action from among several alternative courses of action.The problem of decision making arises whenever a number ofalternatives are available. Such as :What should be the price of the product?What should be the size of the plant to beinstalled? How many workers should beemployed? What kind of training shouldbe imparted to them?What is the optimal level of inventories of finished products, rawmaterial, spare parts, etc.?Therefore we can say that the problem of decision making arises due tothe scarcity of resources. We have unlimited wants and the meansto satisfy those wants are limited,
  2. 2. with the satisfaction of one want, another arises, and here arises theproblem of decision making.While performing his function manager has to take a lot of decisions inconformity with the goal of the firm. Most of the decisions are takenunder the condition of uncertainty, and involves risks.The main reasons behind uncertainty and risks are uncertainbehavior of the market forces which are as follows:The demand and supplyChanging business environmentGovernment policiesExternal influence on the domestic marketSocial and political changesEconomic problem:Meaning of Economic problem: To know the meaning of the term economicproblem we have to put together the four characteristics i.e.Human wants are unlimited.Human wants vary in theirintensity.The means or resources are relativelylimited. There are alternative uses of thelimited resources.Therefore economic problem can be called as the problem related to theunlimited wants with limited resources. Problem arises due to thisunlimited wants only. Resources used to satisfy one want cannot beused to satisfy the other want – it means that every man begins to facethe problem of economizing his means.The problem of economy is how to use the relatively limited resourceswith alternative uses in the face of unlimited wants.Every try to use his/her limited resources with alternative uses sothat he gets the maximum satisfaction out of his limited resources.Everyone tries to satisfy those wants which are most urgent or intenseand then those wants slightly less urgent and so on thus sacrificing the
  3. 3. satisfaction of those wants which lower on the scale of preferencefor which he may not have resources.This is known as the problem of economy-- - how to make themaximum use of limited resources.
  4. 4. The sources of Economic problem:Resource sand scarcity: This is the main source of the economic problem. wehave limited resources and the means to satisfy those resources are verylimited.Here the resources of the society consists not only of the free gifts of thenature such as land, forests and minerals, but also of human capacityboth mental and physical and of all sorts of man-made aids to furtherproduction, such as tools, machinery, building etc.These resources can be divided into three main groups: 1. All those free gifts of nature, such as land, forests, minerals, etc. are commonly called as natural resources and known to economists as LAND. 2. All human resources, mental and physical, both inherited and acquired, which economists call LABOUR. 3. All those man-made aids to further production, such as tools, machinery, plants and equipments, including everything man- made which is not consumed for its own sake but is used in the process of making other goods and services, and which is known to economists as CAPITAL.Economics help us in economizing our means. It helps us inunderstanding the problem and making the right decision so thatits helpful for the organization for its further planning.Managerial economic is concerned with decision making at the firm level.Decision making problems faced by business firms: • To identify the alternative courses of action of achieving given objectives. • To select the course of action that achieves the objectives in the economically most efficient way. • To implement the selected course of action in a right way to achieve the business objectives.The prime function of management is Decision making and forwardplanning. Forward planning goes hand in hand with decision making.Forward planning means establishing plans for the future.