Decision making involves selecting the best action from various alternatives, focusing on marginal analysis of costs and benefits. Optimal decisions are made when the marginal benefit exceeds the marginal cost, ensuring maximum net benefit. Managers should aim for a balance where total benefits equal total costs to achieve optimal activity levels.

1. DECISIONS ARE MADE AT THE MARGIN BY : H.N.Sujan kumar Urs & Ankitha

2. Introduction Decision making may be defined as the process of selecting the suitable action from among several alternative courses of action. The problem of decision making arises whenever a number of alternatives are available. Such as : What should be the price of the product? How many workers should be employed? What should be the size of the plant to be installed?

3. How does thinking at the margin change the decision making process? The key factor in the economics of decision making is that Decisions are made at the margin. What this means is that a decision maker looks at the additional or marginal cost of an action , the additional or marginal benefit of the decision and if the incremental benefit is greater than the incremental cost, the action is taken.

4. How does thinking at the margin change the decision making process? Doing so leads to the optimal decisions being made, subject to preferences, resources and informational constraints. People’s decisions tend to be marginal ( incremental ) processes. Microeconomic analysis stresses how people optimize , which usually entails balancing expected marginal benefits against expected marginal costs.

5. Marginal Benefit & Marginal Cost & net benefit Marginal benefit (MB) Change in total benefit (TB) caused by an incremental change in the level of the activity Marginal cost (MC) Change in total cost (TC) caused by an incremental change in the level of the activity Net Benefit (NB) Difference between total benefit (TB) and total cost (TC) for the activity NB = TB – TC Optimal level of the activity (A*) is the level that maximizes net benefit

6. Marginal Benefit & Marginal Cost

7. Optimal Level of Activity NB TB TC 1,000 Level of activity 2,000 4,000 3,000 A 0 1,000 600 200 Total benefit and total cost (dollars) Panel A – Total benefit and total cost curves A 0 1,000 600 200 Level of activity Net benefit (dollars) Panel B – Net benefit curve • G 700 • F • • D’ D • • C’ C • • B B’ 2,310 1,085 NB* = $1,225 • f’’ 350 = A* 350 = A* • M 1,225 • c’’ 1,000 • d’’ 600

8. Using Marginal Analysis to Find Optimal Activity Levels If marginal benefit > marginal cost Activity should be increased to reach highest net benefit If marginal cost > marginal benefit Activity should be decreased to reach highest net benefit Optimal level of activity When no further increases in net benefit are possible Occurs when MB = MC

9. Using Marginal Analysis to Find A* MB > MC MB < MC NB A 0 1,000 600 200 Level of activity Net benefit (dollars) 800 • c’’ • d’’ 100 300 100 500 350 = A* MB = MC • M

10. Conclusion Hence, we can conclude that a manager before taking a decision should aim at achieving the optimal point i.e., a situation where the total benefit is equal to the total cost. We can say that decisions are made at margins.

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