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Basic economic tools in managerial economics for decision making | MBA Knowledge Base

1/7/13 9:11 PM

Basic economic tools in managerial economics for decision making

Business decision making is essentially a process of selecting the best out of alternative opportunities open to the firm. The steps below put managers analytical ability to test and determine the appropriateness and validity of decisions in the modern business world. Following are the various steps in decision making process: 1. 2. 3. 4. 5. 6. 7. Establish objectives Specify the decision problem Identify the alternatives Evaluate alternatives Select the best alternatives Implement the decision Monitor the performance

Modern business conditions are changing so fast and becoming so competitive and complex that personal business sense, intuition and experience alone are not sufficient to make appropriate business decisions. It is in this area of decision making that economic theories and tools of economic analysis contribute a great deal. Basic economic tools in managerial economics for decision making: Economic theory offers a variety of concepts and analytical tools which can be of considerable assistance to the managers in his decision making practice. These tools are helpful for managers in solving their business related problems. These tools are taken as guide in making decision. Following are the basic economic tools for decision making: 1. 2. 3. 4. 5. Opportunity cost Incremental principle Principle of the time perspective Discounting principle Equi-marginal principle

1) Opportunity cost principle:

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Basic economic tools in managerial economics for decision making | MBA Knowledge Base

1/7/13 9:11 PM

By the opportunity cost of a decision is meant the sacrifice of alternatives required by that decision. For e.g. a) The opportunity cost of the funds...