Lecture 02

UNIT -1 BASICS OF MANAGERIAL ECONOMICS LESSON – 2 CONCEPT OF ECONOMICS IN DECISION MAKING

What do you mean by decision making? Well decision making is not something which is related to managers only or which is related to corporate world, but it is something which is related to everybody’s life. Whether a person is working or non working, irrespective of his/her field decision making is important to everyone. 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 at the 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 decide what to first and what to do next. Therefore decision making can be called as choosing the right option from the given one. To decide is to choose. Whether to do this or to do that is what decision making. Meaning of decision making: Decision making is the most important function of business managers. Decision making is the central 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. Such as : What should be the price of the product? What should be the size of the plant to be installed? How many workers should be employed? What kind of training should be imparted to them? What is the optimal level of inventories of finished products, raw material, spare parts, etc.? Therefore we can say that the problem of decision making arises due to the scarcity of resources. We have unlimited wants and the means to satisfy those wants are limited,

with the satisfaction of one want, another arises, and here arises the problem of decision making. While performing his function manager has to take a lot of decisions in conformity with the goal of the firm. Most of the decisions are taken under the condition of uncertainty, and involves risks. The main reasons behind uncertainty and risks are uncertain behavior of the market forces which are as follows: The demand and supply Changing business environment Government policies External influence on the domestic market Social and political changes Economic problem: Meaning of Economic problem: To know the meaning of the term economic problem we have to put together the four characteristics i.e. Human wants are unlimited. Human wants vary in their intensity. The means or resources are relatively limited. There are alternative uses of the limited resources. Therefore economic problem can be called as the problem related to the unlimited wants with limited resources. Problem arises due to this unlimited wants only. Resources used to satisfy one want cannot be used to satisfy the other want – it means that every man begins to face the problem of economizing his means. The problem of economy is how to use the relatively limited resources with alternative uses in the face of unlimited wants. Every try to use his/her limited resources with alternative uses so that he gets the maximum satisfaction out of his limited resources. Everyone tries to satisfy those wants which are most urgent or intense and then those wants slightly less urgent and so on thus sacrificing the satisfaction of those wants which lower on the scale of preference for which he may not have resources. This is known as the problem of economy--- how to make the maximum use of limited resources.

The sources of Economic problem: Resource sand scarcity: This is the main source of the economic problem. we have limited resources and the means to satisfy those resources are very limited. Here the resources of the society consists not only of the free gifts of the nature such as land, forests and minerals, but also of human capacity both mental and physical and of all sorts of man-made aids to further production, 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 in understanding the problem and making the right decision so that its 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 forward planning. Forward planning goes hand in hand with decision making. Forward planning means establishing plans for the future.