Economics plays as crucial a role in business practices as in our daily lives. Companies face a variety of challenges every day. To maximize output in an economical way, managers need to apply many economic theories and concepts. The application of these economic tools, theories, and concepts to decision-making in business is known as managerial economics or business economics.
Understanding decision making
Decision-making is the process of selecting the right course of action from several alternatives. When an alternative to an approach exists, the problem of decision making emerges. Decision-making is an integral part of everyone’s life. The way an organization is managed dictates its failure or success. A leader is responsible for making sound decisions that contribute to the success of the organization. Having thorough knowledge of the economic aspects of a business and its projects is the key to success.
Managerial economics is applied by many large organizations to manage their resources and teams better.
There are many principles that can be utilized by leaders to better manage the efficiency of their teams. When planning ahead, managers need to focus on many aspects of business decision-making, such as:
- Resource allocation which is one of the top concerns for leaders. Managers have to ensure their team has access to resources and that they are used in the most economical way possible to complete their tasks.
- Inventory allocation is also a major challenge. Leaders have to analyze demand and supply models and ensure that the transportation of inventory is cost-effective.
- A crucial role for managers and leaders is deciding the pricing for the products. Making a choice between different pricing methods is a problem that requires very sound decision-making skills.
- Managers must also think about the future of their organization. Planning for future investment is a pillar of success.
Economics and decision making
Business economics is the link between decision sciences and economic theory in managerial decision-making. The goal of managerial economics is to help managers and leaders make better decisions. With multiple options available, choosing one that offers the most benefits to the organization is important. Decision-making is mostly due to resource scarcity. With finite resources and nearly infinite ways to use them, decision-making can become extremely challenging. Managers also must make important decisions in the face of risks and uncertainty. Risk and instability is created by the unpredictable behaviour of markets due to factors such as:
- Social and political changes.
- Foreign influence on markets.
- Government policies.
- Changing business environment.
- Demand and supply changes.
Economics helps business leaders navigate these risks by providing a framework for making better decisions despite uncertainty. Students interested in pursuing a managerial or leadership role will need to learn the application of economics to the decision-making process in businesses. The best way to learn this is through an MBA online from Aston University that will teach you how to think like a leader and make sound business decisions. This will prepare you for the real world for continued professional success.
Macroeconomic decisions
Managers and leaders need to have a clear understanding of the impact of changing employment levels, consumer behaviours and trends, inflation, financial and banking trends, and interest rates. They must also understand the ramifications of legal factors on business decisions. Federal and state regulations on employment practices, intellectual property protection, accounting, and trade practices will also affect businesses. Macroeconomic factors affect decision-making in business in multiple ways. Our economy is cyclic in nature. At the crest of the cycle, organizations tend to hire more so they can keep up with increasing consumer demand while at the trough, organizations hire fewer employees and may even have to conduct layoffs. In businesses that are well-capitalized, many strategic advantages can be gained by moving against such economic trends. During prosperity, these companies can invest in the latest technologies that increase productivity even with fewer employees. During an economic downturn, such organizations can both capitalize on the talent available and hire talented professionals at a lower cost.
Inflation affects both businesses and consumers. It refers to the rising costs of products and services. In most organizations, prices are raised to keep up with inflation rates to maintain profits. Companies that are well-capitalized can take a different route by using these inflationary periods to keep their prices stable to gain more market share. For managers and leaders, understanding how macroeconomic uncertainty affects decisions is an important skill.
Microeconomic decisions
Microeconomic decisions are based on the understanding that people make choices based on the information they have on hand. Making decisions is never easy because they all come with trade-offs or opportunity costs. Opportunity costs are the total of what is given up by making a decision. In many cases, a decision may only be reasonable for a certain period of time or expenditure. Managers must also know when to transition to different decisions. There are many microeconomic factors that affect decision-making. Deciding on the optimal levels of inventory and production at any time requires a keen knowledge of marginal benefit and the point at which revenue will exceed the expense of keeping inventory. With constantly changing economic factors, it is important to make production-related decisions on a regular basis.
Managers also need to keep up with the constantly changing costs of different advertising and marketing methods. Determining the potential ROI from various marketing methods such as paid search ads and television advertising depends on changing consumer behaviours and cost. Managers also need to decide whether they should use these marketing methods to engage their customers or compete with their competitors. A lot of organizations today choose not to focus on traditional advertising. They focus on social media because it allows them to engage with their clients. Deciding which course of action will yield the most benefit is the job of a leader.
If you are striving to be a business leader, it is important to gain a thorough understanding of economic decision-making in business. This will allow you to make decisions that will make you an asset to any organization.