What do you mean by decision making?
Meaning of Decision making: – Decision making is the main objective of Managerial Economics. 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.
Well, decision-making isn’t just for managers or the business world; it affects everyone’s life. Regardless of whether an individual is employed or unemployed, decision-making is critical to all. Regardless of the job you are doing, you must make a decision. As a participant, you must make numerous decisions.
What is the nature of decision making in economics?
The way of managing the firm decides its success and failure. This observation made by many economists led to the creation of this discipline. The manager invokes a sense of leadership and guides his team during the project. One more goal which should is important for a firm to succeed is the knowledge of the economic aspects of the project.
What is the scope of decision making in economics?
Managerial economics is a proven concept and many big firms use it to better manage the different teams. The managers of the department and their heads look after the working of the company. Theorists have defined a set of rules for various problems using the principles which are helpful to better manage the efficiency of different teams and departments.
These are the four main aspects of decision making that help managers plan ahead for their team: –
- Resource Allocation: – Resources always are the top concern for managers. It is often that most of them feel that their team has too little manpower to complete the task at hand. It is also one of the principles that allow the best use of the resources to complete the task.
- Inventory: – Inventory allocation is another one of the major challenges. But, they must be on top of these aspects by analyzing the demand and supply models. Managers can get a better hold of management and transport of inventories by queuing products.
- Pricing: – Fixing prices for the products in any firm is a crucial part of the decision making process. Pricing problems involve decisions about various methods of pricing that firms need to adopt.
- Investment: – Managers must be aware of the future of their firms. In this manner, they can have oversight of falling prey to negative market forces. Thus, investment planning is of the pillars.
What are the steps for decision making?
The steps taken in Decision Making are as follows: –
- Problem Definition: – Defining the problem is the first step in realizing the potential errors of the team. Managers must be aware of the problems and define them for faster resolution. Otherwise, the failure to define and identify the problem often derails projects. Important in economics.
- Identifying the goal: – Creating detailed goals of the firm may help managers later arrive at good results. Managers should know about the current strengths and weaknesses of the firm. Also, having knowledge of the chances that exist in the market makes up for a better realization of the goals.
- Coming up with alternatives: – It is not always that everything aligns as per the set goals. Markets are highly volatile and a slight change might impact heavily on the firm. Thus, managers must have a deep knowledge of the framework set by them. Also, they must then devise plans for all possible cases where changes might affect the project. A crisis management plan must be devised by the manager in order to not be heavily impacted by external changes.
- Forecasting: – The manager must work based on the crisis management plan. Also, they must be good at predicting the results of their decisions. In this way, the manager still is in charge of the situation. Also, things can be saved from going south even if a slight change in the market forces the team to adopt new ways.
- Decision Making: – Once all the inquiry is done then the preferred action is taken in this final step, the aims and the results are directly measurable. A crest to the plan set by the manager. The final step involves him/her making decisions for the team and the firm at large. These decisions are inspired by in-depth study and after weighing the pros and cons of the problem at hand, employing all the above steps in sequence.
Economics and Decision Making
Managerial economics provides a link between economic theory and the decision sciences in the analysis of managerial decision making. You need to make decision irrespective of the work you are doing. What if you go to the movies and shop at the very same time? It is impossible to do two things simultaneously. You must choose what to do first and then what to do next. As a result, decision making can be described as selecting the best choice from a set of options. To make a decision is to make a choice. Decision making involves deciding whether to do this or that.
Definition of decision making: – Decision Making can be described as the process of choosing the best course of action from a variety of options. Most significant aim of business manager is decision making. Managerial Economics’ main goal is to help people make better decisions. When a number of options are open, the issue of decision making occurs. For example: –
- What would the price of the product be?
- What should the plant’s size be when it’s installed?
- How many employees should be hired?
- What kind of education do they receive?
- What is the ideal level of finished goods, raw materials, spare parts, and other inventory?
As a result, we can assume that the issue of decision making occurs as a result of resource scarcity. We have an infinite number of desires and a finite number of ways to fulfill them; when one desire is satisfied, another emerges, posing a decision making challenge. When doing his job, the manager must make several choices in order to achieve the firm’s objectives. The majority of decisions are made in the face of uncertainty and include risks.
The key causes of instability and risk are the following market forces’ unpredictable behavior are as follows: –
- The demand and supply
- Changing business environment
- Government policies
- External influence on the domestic market
- Changes in society and politics
What is economic problem?
Meaning of Economic problem: – An economic method can be expressed as a problem involving unlimited wants and limited resources. The issue occurs solely as a result of these unrestricted desires. Since assets used to fulfill one need cannot be used to satisfy another, every man addresses the challenge of economizing his wealth. The meaning of the term “economic problem” is “a problem that affects the economy”.
To understand what an economic issue is, we must combine the four characteristics, as follows: –
- Human desires are limitless.
- The strength of human desires varies.
- The assets and means available are small.
- There are other ways to put the scarce resources to good use.
In the face of limitless desires, the economic dilemma is how to use the comparatively restricted resources with alternative uses. Every person should make every effort to put his or her limited resources to possible alternatives in order to get the most satisfaction from his or her constrained capacity. Everyone seeks to fulfill the most urgent or extreme desires first, then those that are marginally lesser urgent, and so on, compromising the fulfillment of desires that are lower on the scale of choice and for which he does not have money. This is known as the economic problem; how to get the most out of limited resources.
The causes of the economic problem: – We have a finite amount of resources, and we also have a finite number of ways to fulfill certain resources. The society’s reserves include not only free gifts from nature, such as soil, trees, and minerals, but also individual physically and psychologically ability, as well as all kinds of man-made aids further to development, such as machines, machinery, and construction.
These materials can be classified into three categories: –
- Natural resources, which include property, trees, rocks, and other free gifts from nature, are referred to as LAND by economists.
- Both mental and physical human capital, both hereditary and produced, which economists refer to as LABOUR.
- All man-made helps to even further manufacturing, such as machines, machinery, crops, and apparatus, as well as anything man-made that isn’t consumed for its own sake but is being used in the production of products and services, and is referred to as CAPITAL by economists.
Economics assists us in maximizing our resources. It aids us in comprehending the issue and making the best decision possible, which is beneficial to the institution’s future planning. Managerial economics is concerned with firm-level decision-making.
Business companies face the following decision-making challenges: –
- To figure out what other options there are for achieving a set of goals.
- To choose the course of action that will accomplish the goals in the most cost-effective manner.
- To correctly execute the chosen course of action in order to meet the company objectives.
Decision-making and the forward preparing are two of management’s most important functions. Forward planning and decision-making go hand in hand. The term “forward planning” refers to the process of making future plans.
Follow the Microeconomic Forces That Drive Good Decisions
There could be following a seven-step method for reasonable, deliberate decision making right now, at least subconsciously: –
- Determine what you want to do: – This will seem to be a simple task. In reality, users can find oneself returning to this first phase for clarification if, for example, they believe their aim is to buy new office equipment but discover that leasing is more cost-effective. In other words, ones overall aim should be to upgrade and repair their existing equipment.
- Gather knowledge that is important: – This move can seem straightforward, particularly if you’re tempted to rely solely on one source. Make an effort not to. Many time-pressed comparatively tiny founders have benefited from online resources, as well as glossy corporate creating and maintaining to impress. One of the most important sources of knowledge is that which you can gather for yourself by speaking with others who have faced similar financial decisions. Their advice and cautionary tales can be one of the most useful in making financial decisions.
- Determine the alternatives and their implications: – Information gathering has the effect of revealing alternatives, which is precisely what you want. However, at some point, you might feel overwhelmed by the availability of data you’ve gathered. It’s hard to keep everything straight. Take this as a cue to pause and arrange your data, then start making notes of your options and their pro and con effects.
- Examine the evidence: – If there had been a phase 312, it would undoubtedly suggest a calming off period – a period during which you step away from the wealth of knowledge you’ve gained, take some time to unwind, and then return to study it all with new mind.
- Make a financial decision: – It doesn’t have to “jump off the screen,” but it has to strike you as the best option. Otherwise, go back to steps 3 and 4 and re-evaluate your primary target. Economic decision-making, like all decision-making, can be a circular process that takes time and consideration.
- Put your decision into action: – It will take some time to put your decision into action, depending on the severity of the situation. However, you can inform your staff of your decision so that they can make the required arrangements and form the basis for it to become a reality.
- Reconsider your choice: – Many ambitious small-business owners can be encouraged to leave this move. Or, if they don’t miss it, they’ll postpone it – at least until they begin to question the wisdom of their financial decision. However, evaluating a decision shortly after you make it has two benefits: you improve your decision-making skills (and gain confidence), and you can use it as a teaching process for your staff to follow. They will learn through your problem-solving abilities and profit from your experiences.