Business Economics and Decision making :
Decision-making and forward planning are two very important functions of the managerial
economist. Decision making is essentially a process of selecting the best out of alternative
opportunities open to the firm. Every manager of a business firm has to face the various kinds of
business problems. They are simple or complex in nature. So the most important function of the
managerial economist is the decision making and forward planning of a business firm.
According 'Louis A. Allen.' "Decision making is the work which a manager performs to arrive at
conclusion and judgement." It means that before taking the decision the manager examines the
relationship between various factors and then come to the conclusion. This act is referred as
decision making.
Decision making comprises the points viz.
1) Decision making is a process of selecting the best alternative out of available alternatives.
2) It is an intellectual work, which manager has to perform before arriving at any conclusion.
3) It is an act of choosing from different alternatives.
In the process of decision making the management of a company can apply the theories and tools
of economic analysis. Economic theories express the functional relationship between two or
more economic variable, under certain given conditions. Application of the economic theories to
the problems of business influences decision making process in three ways.
1) It offers clarity of various economic concepts viz. demand, price, cost of production,
externalities etc.
2) It helps in ascertaining the relevant variables and specially reveals the relevant data.
3) Economics expresses the relationship between various economic variables and provide
consistency in analysis. It helps in drawing the accurate conclusions. Thus applications of
economic theories to the problems of business firms guides, assists and streamlines the decision
making process, as well as it contributes to the valid decisions.
Economics helps to the business manager in various ways. By the application of economic
theories and principles manager of a firm solves the various problems in business sector. Internal
problems are solved with the help of micro-economic analysis like demand, Production, costs,
price, profit, investment, resource allocation etc. Also the external problems are solved with the
help of macroeconomic theories like, national income, fiscal policy, economic policy, monetary
policy, employment, business cycles, international trade, inflation, defilation etc. By using the
micro and macro economic theories managerial economist arrives at final conclusions and
business decisions are to be taken. Thus, economic theories helps to manager to analyse the
, problems, to derive the conclusions, to take the decisions, and to solve the business problems.
Thus decision making and forward planning is prime functions of managerial economics.
Managerial Economics and Economic Theory:
Managerial economics uses economic theory to solve business decision-making problems.
Economic theory has been broadly divided into microeconomics and macroeconomics. Briefly,
microeconomics deals with the theory of decision-making by individual consumers, resource
owners and business firms in a free market economy. Macroeconomics, on the other hand,
focuses on the study of economy as whole and its various aggregates such as national income,
aggregate level of employment, general price level. It is important to note that though managerial
economics draws on both microeconomics and macroeconomics.
Managerial economics is however essentially a course in applied microeconomics,
macroeconomic conditions of the economy such as level of aggregate demand (which determines
whether recessionary or boom conditions prevail in the economy), rate of inflation, rate of
economic growth, that make up macroeconomic environment within which firms work are also
very important for decision making by business firms.
Microeconomics has built models which explain how an individual consumer chooses among
goods so as to maximise his satisfaction and individual business firm decides to fix price and
output of its products to maximise profits and what factor combination it uses for producing
them so as to minimise cost for a given level of output.
The parts of microeconomics which deal with demand theory, analysis of cost and production,
theory of determination of price and output under different market structures are particularly
useful in making business decisions about such matters.
The study of macroeconomics which focuses on the economy as a whole is also highly useful for
management economist who is faced with various decision-making problems. This is because
firms do not work in a vacuum. The level of overall economic activity, national income and
employment, aggregate demand conditions, government policies (both fiscal and monetary),
interest rate, the changes in price level greatly affect business firms.
These aggregates of the economy make up the macroeconomic environment which affects
business decisions of managers. Therefore, in recent years macroeconomics for management
which is particularly relevant for business decision making has been developed.
Forecasts of future demand, investment decisions by business firms are especially based on the
overall situation of the economy and its growth prospects. Macro-theories of consumption,
investment demand, the general price level and business cycles are particularly relevant for
making capital investment expenditure which yields returns in future years.
Decision-making and forward planning are two very important functions of the managerial
economist. Decision making is essentially a process of selecting the best out of alternative
opportunities open to the firm. Every manager of a business firm has to face the various kinds of
business problems. They are simple or complex in nature. So the most important function of the
managerial economist is the decision making and forward planning of a business firm.
According 'Louis A. Allen.' "Decision making is the work which a manager performs to arrive at
conclusion and judgement." It means that before taking the decision the manager examines the
relationship between various factors and then come to the conclusion. This act is referred as
decision making.
Decision making comprises the points viz.
1) Decision making is a process of selecting the best alternative out of available alternatives.
2) It is an intellectual work, which manager has to perform before arriving at any conclusion.
3) It is an act of choosing from different alternatives.
In the process of decision making the management of a company can apply the theories and tools
of economic analysis. Economic theories express the functional relationship between two or
more economic variable, under certain given conditions. Application of the economic theories to
the problems of business influences decision making process in three ways.
1) It offers clarity of various economic concepts viz. demand, price, cost of production,
externalities etc.
2) It helps in ascertaining the relevant variables and specially reveals the relevant data.
3) Economics expresses the relationship between various economic variables and provide
consistency in analysis. It helps in drawing the accurate conclusions. Thus applications of
economic theories to the problems of business firms guides, assists and streamlines the decision
making process, as well as it contributes to the valid decisions.
Economics helps to the business manager in various ways. By the application of economic
theories and principles manager of a firm solves the various problems in business sector. Internal
problems are solved with the help of micro-economic analysis like demand, Production, costs,
price, profit, investment, resource allocation etc. Also the external problems are solved with the
help of macroeconomic theories like, national income, fiscal policy, economic policy, monetary
policy, employment, business cycles, international trade, inflation, defilation etc. By using the
micro and macro economic theories managerial economist arrives at final conclusions and
business decisions are to be taken. Thus, economic theories helps to manager to analyse the
, problems, to derive the conclusions, to take the decisions, and to solve the business problems.
Thus decision making and forward planning is prime functions of managerial economics.
Managerial Economics and Economic Theory:
Managerial economics uses economic theory to solve business decision-making problems.
Economic theory has been broadly divided into microeconomics and macroeconomics. Briefly,
microeconomics deals with the theory of decision-making by individual consumers, resource
owners and business firms in a free market economy. Macroeconomics, on the other hand,
focuses on the study of economy as whole and its various aggregates such as national income,
aggregate level of employment, general price level. It is important to note that though managerial
economics draws on both microeconomics and macroeconomics.
Managerial economics is however essentially a course in applied microeconomics,
macroeconomic conditions of the economy such as level of aggregate demand (which determines
whether recessionary or boom conditions prevail in the economy), rate of inflation, rate of
economic growth, that make up macroeconomic environment within which firms work are also
very important for decision making by business firms.
Microeconomics has built models which explain how an individual consumer chooses among
goods so as to maximise his satisfaction and individual business firm decides to fix price and
output of its products to maximise profits and what factor combination it uses for producing
them so as to minimise cost for a given level of output.
The parts of microeconomics which deal with demand theory, analysis of cost and production,
theory of determination of price and output under different market structures are particularly
useful in making business decisions about such matters.
The study of macroeconomics which focuses on the economy as a whole is also highly useful for
management economist who is faced with various decision-making problems. This is because
firms do not work in a vacuum. The level of overall economic activity, national income and
employment, aggregate demand conditions, government policies (both fiscal and monetary),
interest rate, the changes in price level greatly affect business firms.
These aggregates of the economy make up the macroeconomic environment which affects
business decisions of managers. Therefore, in recent years macroeconomics for management
which is particularly relevant for business decision making has been developed.
Forecasts of future demand, investment decisions by business firms are especially based on the
overall situation of the economy and its growth prospects. Macro-theories of consumption,
investment demand, the general price level and business cycles are particularly relevant for
making capital investment expenditure which yields returns in future years.
