Steps Involved in the Decision-Making System - Essay Example

Basic Economics QUESTION Managerial economics assist manager to make proper decisions. There are six steps involved in decision making system. The first step is defining the problems of a respective situation. The first step of the decision making is the key factor of this model. This step mainly evaluate the kind of problems, managers are going to be faces in future. The definition of the problems will support managers to make appropriate decisions. The second step is to determine the objectives. The objective mainly explains the goal of a firm. The aim of a firm is to maximize the profits and balance the figures of revenues and expenses. The next step of the decision making model is to explore alternative options or solutions. Decision makers always face some challenges at the time of taking decisions. Decision makers are required to have some alternatives, which influences their decisions. The forth step of the decision making model is to make prediction for the future consequences. Prediction is important for decision makers to be prepared for the future. The fifth step is to prepare and make a selection of all the outcomes of the model and last and very important is to execute a sensitivity analysis for ensuring that decisions are made on the basis of analysis. For instance, absence of any step in the procedure of decision making will be accountable for inappropriate analysis of a situation, which will be accountable for making unsuitable decision by managers leading to losses in businesses (Samuelson and Marks 7-14). QUESTION 2 Marginal analysis is an important factor in managerial economics for the managerial decision making. There are several advantages of marginal analysis in the business as well as individual life. Marginal analysis helps to maintain the balances among the desire of individual needs and business needs. A firm is benefited from marginal analysis in the procedure of decision making, so that business operations can be conducted systematically. Additionally, marginal analysis aids policy makers of firms for managing the resources in a proper manner (Samuelson and Marks 29-75). The marginal cost is the additional cost, which occurs at the time of production. Marginal cost includes the extra cost of labour and materials cost. On the other hand, marginal revenue is the additional profits earn by a firm at the time of surplus sale of products. Marginal revenue aids a company in performing business operations in a better competitive nature. Marginal analysis is mainly calculated at the time of additional turnover. In this context, economists evaluate that at the lower level of production and sales, marginal revenue is greater or more than the marginal cost. When firms come to a position where marginal revenue and marginal cost is in equal position, at that time firms are in the stage of maximising profits by selling extra units. For instance, marginal analysis can misleads any firm by providing error data such as inadequate information relating to fixed cost and variable cost. Marginal analysis is inefficient in the process of computing cost and revenue between two periods (Samuelson and Marks 29-75). QUESTION 3 Regression analysis is an important tool of statistics, which is used for evaluating the relationship among the dependent and the interdependent variables. In businesses, regression analysis has been used for many purposes. The regression analysis is primarily used for evaluating the results of any examination. The management of an organisation applies regression analysis for prediction any data in an effective manner. Regression analysis is very helpful for creating the demand function by applying multiple regression analysis, which will be helpful to accept the features of the products. Regression analysis uses notional data that are forecasted with the aim of determining the relationship between the variables (Samuelson and Marks 173-191). . The t-test is a proportion of the combination of parameter value and standard error of the parameter. The relationship between the two components is contrary in nature and thus, increases in parameter value, the standard error of the parameter value decreases. However, the t-test is elastic in nature, as it can be used in numerous situations (Samuelson and Marks 173-191). The R-squared test is the tool, which is helpful in evaluating the element of total difference in the dependent variables, as identified in regression analysis. The limitation of the R-square test is that it is inefficient in collecting coefficient data (Samuelson and Marks 173-191). The f-test is a final measurement tool, which measures the implication of the regression analysis. It describes the ratio between the total explained variables and total unexplained variables (Samuelson and Marks 173-191). QUESTION 4 In the perfect competitive market, a firm is required to be aware about the market and its own position. Several procedures are provided by which a perfectly competitive firm can evaluate its future sales and can set up its prices. At first, a firm needs to recognize the consumer’s basic need or demand and then determine its input. After the evaluation of the demand, a firm needs to set up the prices of the products on the basis of the related products’ prices that are offered in the market segments. The prices of the products are the main components of determining the purchase decisions and preferences of consumers in accordance with their incomes. The aforementioned mentioned factors that include product prices, related products’ prices and consumer incomes will be helpful in the ‘strategic planning processes’. Managers with the assistance of market information will be able to formulate appropriate plan relating to promotion, which plays a vital role in the selling process (Samuelson and Marks 80-131). QUESTION 5 Time series analysis is a method, which determines the group of numerical observations to explore the characteristics and the meaning of data. Time series analysis is very useful in the evaluation of the altered values of the economic variables such as assets and securities, which changes with time. The primary goals of time series analysis are to comprehend data. The time series analysis has the forecasting features. It can predict data on the basis of certain trends (Samuelson and Marks 182-197). Differences have been noticed between time series analysis and regression analysis in the context of ascertaining causal relationships between variables. Time series analysis figures out the difference between the regression and correlation models by calculating the elasticity and unfinished correlation. The regression model helps in the calculation of least square data of single and multiple liner regression models. The time series model is used to determine the appropriate application of the time series by evaluating the difference between regression analysis and time series analysis. The Regression analysis uses dummy variables to analyse the regression model (Samuelson and Marks 182-197). The time series forecasting is the most popular non-casual approach, which helps to plan the future sales of any product. Time series forecasting is applied in different scenarios, as it is easily applicable than other statistical analysis. The moving average is one of the most common methods, which are based upon the time series for forecasting data. The time series is very systematic in nature. In a hypothetical firm, the upward trend of the sales, seasonal behaviour of the sales and the reliance of the business condition refer as systematic movement. The moving average method of time series forecasting reduces the effect of the random results, which may change any forecast of sales related to market (Samuelson and Marks 182-197). QUESTION 6 Returns to scale is very significant tool to define the figure of long-run average cost. The returns to scale is also provides adequate support in evaluating the production rates of small and large firms in order to assess their efficiency. There are some factors, which will make an impact upon shaping the structure of the markets and industry. The constant average cost easily simulates the production process of firms. The second factor is the accumulation of bulk factors that include automation, labour specialization, distribution, advertisement and capital-intensive mass production technique. The firm can increase the scale of productivity by applying new production method, but it will not be applicable for smaller production firms. Additionally, several varieties of fixed expenses such as advertising, promotional and distributional expenses influences in declining average cost. The increase in average cost is also affected firms stability. The increase in average cost refers as problems for a firm in conducting its business operations effectively. An increase in average cost can create difficulties in organizing managerial functions in a systematic manner (Samuelson and Marks 223-234). QUESTION 7 In economics, when the marginal revenue is equal to the marginal cost, a firm maximizes its production. The major fact underlying the result of maximizing profit from the production is that the marginal revenue is greater than the marginal cost. The formula of marginal cost equals to marginal revenue equals to minimizing the average profit is known as profit maximization. The average total cost is the outcome of the total cost, which is divided by the total good produced. Being an important component of supply and demand, the average total cost can create a huge effect in supply curve. The average total cost always maintains a unique relationship with the marginal cost. The marginal cost is higher than the averages cost when the average cost is rising. The stage also implies that at this point the market conditions is appropriate for firms to make profit through the sale of extra units of products (Samuelson and Marks 44-49). QUESTION 8 Two types of factors are identified to be involved in building the economic boundaries that include economic factors in economic development and non-economic factors in economic development. The economic factors play a decisive role for developing the economic boundaries. There are some economic factors, which aids on developing the economic boundary. To increase a country’s economic stability, the national income or the capital of a country plays a vital role. It is mandatory to keep the national income within the boundary to increase the growth of the economic boundary. The natural resources need to be operated very economically and the presence of the natural resources within a country is referred as the assets of a country. To make growth in a country’s economic boundaries, it needs to increase the production in the agricultural products. An increase in the excess output of the agricultural products is recognised as ‘marketable surplus’ in economic term. In addition, foreign trade is useful for making a country’s economic boundaries strong. Foreign trade is efficient in building different industries within a very short period of time. The economic system of a country is also identified to make huge impact on the growth of the economic boundary. Non-economic factors are also identified to have great impact on the development of economic boundaries. Human resources are non-economic factors that include labour power or efficiency of skilled, semi-skilled and unskilled labour of a country. Political influence is another important factor, which is accountable for ascertaining good economic condition, as many industries of the under-developing countries are regulated by the government. The development of a country also depends upon the social activity of the people. People belongs to society must show their interest in economic activities for enhanced growth of societies (Chand, “Factors that Influence the Economic Development of a Country”). QUESTION 9 Several discussions had been held for the support and as well as in contradiction to trade barrier. Trade barrier helps to create jobs in the markets as per the comparative advantages. Trade barrier protects the domestic or local trade as well as jobs from international interference. Trade barrier customises the prices of the products for better expansion in the local markets. Local or domestic products with the assistance of trade barrier are consumed more, which in turn improves their image in the market segments. Trade barrier helps to reduce the inflation rate by increasing the consumption of native products of a country. It assists in increasing the efficiency and skill of labour by producing specific products. The comparative advantages of a country increase in domestic jobs in the local industry. However, it has been argued that international trade is identified to be influencing on a global context and it reduces the image of domestic industries. Trade barrier is imposed through different methods that include quotas, tariff and blocking. Free trade creates a huge entrance or opening for the agricultural and steel products. In contrast, trade barrier is argued to raise the rates of taxes, trade tariffs or import export duties, which increase the value of the traded goods. It is also imposed through quotas based on which import as well as export operations of products are limited to a certain extent. Additionally, the method of blocking is also applied as trade barrier by promoting trade in a specific area for promoting competition from foreign competitors. Trade barrier is a protection act for import along with export operations of goods by minimising risk factors such as competition and high cost among others (Samuelson and Marks 421-423). QUESTION 10 Comparative advantage is a theory or law belonging to the subject economics. It mainly contains the gains from trade and other various factors that influence technological progress. Comparative advantage is also identified as absolute advantage. International trade act as a mutually favourable consideration for all the countries that are involved in it. Diversification in specialization in the productivity of the various countries mainly depends upon the skills of labours, capital investments and technological factors. These factors mainly focus attention towards countries that are mainly specialized in producing basic food products, because of unskilled labours and low rate of supply of capital as well as the lack of technological knowledge. Similarly, developed countries that are technically advanced are specialized in producing technological devices as well as productive in building up the infrastructures. The labour productivity is one of the vital factors, which affect the cost of production. Another component is the price and the labour cost of a country. In this respect, the aforementioned factors are considered important for ensuring that trade activities are conducted in an effective manner for better economic growth. Comparative advantage also ensures that technologically advanced products are traded. The items traded in a direction from the emerging economy to developed economy (Samuelson and Marks 268-275). QUESTION 11 Several losses are identified to be affecting the society but some economic losses are occurring due to competition between monopoly market and perfectly competitive market. Losses arising due to competition as firms performing in a monopoly manner always sets higher price, which will affect the income of individuals. Monopoly market has very little number of firms for which the competition level is low. The society faces deadweight loss due to high prices set of policy in monopolistic markets. The price rate is always higher than the marginal cost, which decreases consumer surplus. Completion between monopoly and perfect completion market creates a social welfare loss. Another disadvantage of monopoly markets is that it transfers the generated economic profits from the consumers to the firms. This creates a huge inequality in the markets. In addition, it also creates barriers for the entry of other firms. The firms performing business operations in the monopolistic markets are recognised to provide specialty and unique products, which creates barrier for the entry of a new firm in the market. The monopoly firm does not has any positively sloped curves such as it has negatively sloped marginal cost curve and negatively sloped demand curved (Samuelson and Marks 436-447). QUESTION 12 The continually down ward slopping average cost curve signifies the creation of a natural monopoly. Natural monopoly is also identified to face different problems. Natural monopoly possesses unique characteristics of downward sloping average total cost curve. The reason behind the downward sloping average cost curve is the lower rate of the unit cost due to the increasing rates of production. Natural monopoly always develops a high amount of fixed cost of production. In this context, the average cost curves are recognised to be very high. In natural monopoly, the marginal cost is very low in nature and rises as per the growth in the production of goods (Samuelson and Marks 436-447). A monopolistic firm always has the tendency to regulate the pricing strategy. The natural monopolist wants to maximise profit. However, government imposes certain regulations to control the pricing strategy of a firm, so that such a firm is not able to maximise profit. There are two policies such as pricing policies and public policies have been created by natural monopoly. The pricing policies are ‘Marginal Cost Pricing’, which is mainly used for representing a loss. By the marginal costing, the deadweight loss can be evaluated. Another pricing policy is the ‘Average Cost Pricing’. The average cost pricing is an approach applied by the government to allow firms to make changes in price. The other reason of the average pricing strategy by the government is to allow firms to earn incentives for recovering the fixed cost. The third is ‘Two-part Tariff pricing policy. In this policy, natural monopolies are allowed to charge price’ which is identified as admittance fee. The consumers who are paying this kind of fee are allowed to purchase products from the monopoly market (Samuelson and Marks 436-447). Works Cited Samuelson, William F., and Marks, Stephen G. Managerial Economics. USA: John Wiley & Sons, Inc., 2012. Print. Chand, Smriti. Factors that Influence the Economic Development of a Country. 2014. Web. 4 Oct. 2014. < http://www.yourarticlelibrary.com/economics/factors-that-influence-the-economic-development-of-a-country/5942> Read More