ROLE OF MANAGERIAL ECONOMICS IN BUSINESS DECISION
Making decisions is an important aspect of today's corporate management. One of the most
challenging jobs a professional manager faces is making a decision. In the management of a
firm, a manager must make various judgments. A manager's existence is occupied with
making and changing decisions. Decision making is a process and a decision is the product
of such a process. Managerial decisions are based on the flow of information. Decision
making is both a managerial function and an organisational process. Managerial function is
exercised through decision making.
The goal of decision-making and planning is to direct human behaviour and effort toward a
future goal or goal. It is organisational in the sense that many choices are made by groups,
teams, committees, and so on, rather than by individual managers. Once a choice is made, it
is carried out in the shortest possible period and at the lowest possible cost. A study of
business decision-making concepts can help managers gain a better understanding of
business problems and improve their capacity to solve problems that arise in business
management. Executives make many types of decisions connected with the business such as
production, inventory, cost, marketing, pricing, investment and personnel. In the long run,
application of principles of business decisions will result in successful outcomes. A good
decision is one that is based on logic, considers all available data and possible alternatives
and applies the quantitative approach.
Organisational decisions are those which the executive makes in his personal capacity as a
manager. They include the adoption of the strategies, the framing of objectives and the
approval of plans. These decisions can be delegated to the organisational members so that
decisions could be implemented with their support. These decisions aim at achieving the best
interests of the organisation. The basic decisions are those which are more important, they
involve long range commitment and heavy expenditure of funds. A high degree of
importance is attached to them. A serious mistake will endanger the company s existence.
The selection of a location, selection of a product line, and decision relating to manage the
business are all basic decisions. They are considered basic because they affect the whole
organisation.
IMPORTANT TYPES OF BUSINESS DECISIONS
I Production Decisions:
Production is an economic activity that involves supplying goods and services for sale in a
market in order to meet consumer demands and maximise profit. The corporate executive
must make the most efficient use of the resources at his disposal. He might have issues with
determining the optimal mix of components for greatest profit, or determining how to use
different machine hours for maximum production advantage, and so on.
,II Inventory Decision:
Inventory refers to the quantity of goods, raw material or other resources that are idle at any
given point of time held by the firm. The decision to hold inventories to meet demand is
quite important for a firm and in certain situation the level of inventories serves as a guide to
plan production and is therefore, a strategic management variable. Large inventory of raw
materials, intermediate goods and finished goods means blocking of capital.
III Cost Decisions:
The firm's competitiveness is determined by its capacity to produce the commodity at the
lowest possible cost. As a result, cost structure, cost reduction, and cost control have become
essential factors in company decisions. Profits would suffer if there was no cost management
because costs would rise. Future business decisions necessitate the selection of options, and
in order to do so, it is vital to understand the costs associated. Cost knowledge about
resources is critical for making business decisions.
IV Marketing Decisions:
The marketing executive must decide on the target market, market positioning, product
development, price routes of distribution, physical distribution, communication, and
promotion as part of market planning. In marketing, a businessperson must make primarily
two separate but linked decisions. They are the decision to sell and the decision to buy. The
question of how much to manufacture and sell in order to maximise profit is central to the
sales decision. The goal of the purchasing choice is to obtain these resources at the lowest
possible price in order to maximise profit. Here the executive’s basic skill lies in influencing
the level, timing, and composition of demand for a product, service, organisation, place,
person or idea.
V Investment Decision:
The problems of risks and imperfect foresight are very crucial for the investment decision. In
real business situation, there is seldom an investment which does not involve uncertainties.
Investment decision covers issues like the decisions regarding the amount of money for
capital investment, the source of financing this investment, allocation of this investment
among different projects over time. These decisions are of immense significance for ensuring
the growth of an enterprise on sound lines. Hence, decisions on investment are to be taken
with utmost caution and care by the executive.
VI Personnel Decision:
An organisation requires the services of a large number of personnel. These personnel
occupy various positions. Each position of the organisation has certain specific contributions
to achieve organisational objectives. Personnel decisions cover the areas of manpower
planning, recruitment, selection, training and development, performance appraisal,
, promotion, transfer, etc. Business executives should take personnel decisions as an essential
element.
Fundamental concepts of managerial economics
The following points highlight the fundamental concepts of managerial economics .Let us
discuss as below:
1. The Incremental Concept
The concept of incremental thinking is simple to grasp. However, putting it into practise is
extremely tough. "It entails assessing the impact of choice options on costs and revenues,
emphasising changes in total cost and total revenue that emerge from changes in prices,
products, procedures, investments, or whatever may be at stake in the decision," says T.J.
Coyne. The two basic concepts lie at the heart of incremental analysis, viz., incremental cost
and incremental revenue. The former refers to the change in total cost resulting from a
decision. Similarly, the latter may be defined as the change in total revenue resulting from a
decision.
A decision is surely profitable if:
a) It increases revenues more than it increases cost.
b) It reduces some cost more than it increases others.
c) It increases some revenues more than it decreases others.
d) It decreases costs more than it decreases revenue.
2. The Concept of Time Perspective
We frequently distinguish between the short-run and the long-run in economics. This
distinction is made without regard to a calendar period, such as a month, quarter, or year. It is
predicated on the speed with which decisions may be made and the variety of factors that go
into production. The short run is the time span during which some things can be changed but
not others. The long-run, on the other hand, is the period during which all factors can be
changed. For example, more output can be produced in the short- run by using more labour
and raw materials. This is basically a short-term decision. But setting up a new factory or
building an entirely new plant is a long-term decision.
As a matter of fact, however, the distinction between the two often gets vague. What's left is
an estimate of those costs that fluctuate and those that do not by the decision under
consideration. In managerial economics we are concerned with the short-run and long-run
effects of decisions on revenues as well as on costs.
The distinction between short-run and long-run income (or demand) is even less clear than
the one between short-run and long-run costs. Maintaining the correct balance across several
runs, i.e., the long-run, short-run, and intermediate-run perspectives, is critical for managerial
decision making. A decision may be based on specific short-term reasons, but it may have a
Making decisions is an important aspect of today's corporate management. One of the most
challenging jobs a professional manager faces is making a decision. In the management of a
firm, a manager must make various judgments. A manager's existence is occupied with
making and changing decisions. Decision making is a process and a decision is the product
of such a process. Managerial decisions are based on the flow of information. Decision
making is both a managerial function and an organisational process. Managerial function is
exercised through decision making.
The goal of decision-making and planning is to direct human behaviour and effort toward a
future goal or goal. It is organisational in the sense that many choices are made by groups,
teams, committees, and so on, rather than by individual managers. Once a choice is made, it
is carried out in the shortest possible period and at the lowest possible cost. A study of
business decision-making concepts can help managers gain a better understanding of
business problems and improve their capacity to solve problems that arise in business
management. Executives make many types of decisions connected with the business such as
production, inventory, cost, marketing, pricing, investment and personnel. In the long run,
application of principles of business decisions will result in successful outcomes. A good
decision is one that is based on logic, considers all available data and possible alternatives
and applies the quantitative approach.
Organisational decisions are those which the executive makes in his personal capacity as a
manager. They include the adoption of the strategies, the framing of objectives and the
approval of plans. These decisions can be delegated to the organisational members so that
decisions could be implemented with their support. These decisions aim at achieving the best
interests of the organisation. The basic decisions are those which are more important, they
involve long range commitment and heavy expenditure of funds. A high degree of
importance is attached to them. A serious mistake will endanger the company s existence.
The selection of a location, selection of a product line, and decision relating to manage the
business are all basic decisions. They are considered basic because they affect the whole
organisation.
IMPORTANT TYPES OF BUSINESS DECISIONS
I Production Decisions:
Production is an economic activity that involves supplying goods and services for sale in a
market in order to meet consumer demands and maximise profit. The corporate executive
must make the most efficient use of the resources at his disposal. He might have issues with
determining the optimal mix of components for greatest profit, or determining how to use
different machine hours for maximum production advantage, and so on.
,II Inventory Decision:
Inventory refers to the quantity of goods, raw material or other resources that are idle at any
given point of time held by the firm. The decision to hold inventories to meet demand is
quite important for a firm and in certain situation the level of inventories serves as a guide to
plan production and is therefore, a strategic management variable. Large inventory of raw
materials, intermediate goods and finished goods means blocking of capital.
III Cost Decisions:
The firm's competitiveness is determined by its capacity to produce the commodity at the
lowest possible cost. As a result, cost structure, cost reduction, and cost control have become
essential factors in company decisions. Profits would suffer if there was no cost management
because costs would rise. Future business decisions necessitate the selection of options, and
in order to do so, it is vital to understand the costs associated. Cost knowledge about
resources is critical for making business decisions.
IV Marketing Decisions:
The marketing executive must decide on the target market, market positioning, product
development, price routes of distribution, physical distribution, communication, and
promotion as part of market planning. In marketing, a businessperson must make primarily
two separate but linked decisions. They are the decision to sell and the decision to buy. The
question of how much to manufacture and sell in order to maximise profit is central to the
sales decision. The goal of the purchasing choice is to obtain these resources at the lowest
possible price in order to maximise profit. Here the executive’s basic skill lies in influencing
the level, timing, and composition of demand for a product, service, organisation, place,
person or idea.
V Investment Decision:
The problems of risks and imperfect foresight are very crucial for the investment decision. In
real business situation, there is seldom an investment which does not involve uncertainties.
Investment decision covers issues like the decisions regarding the amount of money for
capital investment, the source of financing this investment, allocation of this investment
among different projects over time. These decisions are of immense significance for ensuring
the growth of an enterprise on sound lines. Hence, decisions on investment are to be taken
with utmost caution and care by the executive.
VI Personnel Decision:
An organisation requires the services of a large number of personnel. These personnel
occupy various positions. Each position of the organisation has certain specific contributions
to achieve organisational objectives. Personnel decisions cover the areas of manpower
planning, recruitment, selection, training and development, performance appraisal,
, promotion, transfer, etc. Business executives should take personnel decisions as an essential
element.
Fundamental concepts of managerial economics
The following points highlight the fundamental concepts of managerial economics .Let us
discuss as below:
1. The Incremental Concept
The concept of incremental thinking is simple to grasp. However, putting it into practise is
extremely tough. "It entails assessing the impact of choice options on costs and revenues,
emphasising changes in total cost and total revenue that emerge from changes in prices,
products, procedures, investments, or whatever may be at stake in the decision," says T.J.
Coyne. The two basic concepts lie at the heart of incremental analysis, viz., incremental cost
and incremental revenue. The former refers to the change in total cost resulting from a
decision. Similarly, the latter may be defined as the change in total revenue resulting from a
decision.
A decision is surely profitable if:
a) It increases revenues more than it increases cost.
b) It reduces some cost more than it increases others.
c) It increases some revenues more than it decreases others.
d) It decreases costs more than it decreases revenue.
2. The Concept of Time Perspective
We frequently distinguish between the short-run and the long-run in economics. This
distinction is made without regard to a calendar period, such as a month, quarter, or year. It is
predicated on the speed with which decisions may be made and the variety of factors that go
into production. The short run is the time span during which some things can be changed but
not others. The long-run, on the other hand, is the period during which all factors can be
changed. For example, more output can be produced in the short- run by using more labour
and raw materials. This is basically a short-term decision. But setting up a new factory or
building an entirely new plant is a long-term decision.
As a matter of fact, however, the distinction between the two often gets vague. What's left is
an estimate of those costs that fluctuate and those that do not by the decision under
consideration. In managerial economics we are concerned with the short-run and long-run
effects of decisions on revenues as well as on costs.
The distinction between short-run and long-run income (or demand) is even less clear than
the one between short-run and long-run costs. Maintaining the correct balance across several
runs, i.e., the long-run, short-run, and intermediate-run perspectives, is critical for managerial
decision making. A decision may be based on specific short-term reasons, but it may have a
