Answer to Question #200516 in Microeconomics for aman

Question

1. The ability to make good decisions is the key to successful managerial performance. Discuss the common elements shared by all decision-making processes. Provide a real-world example to elaborate your answer.
2. Marginal analysis is one of the most useful concepts in economic decision making. Discuss and show examples including graphs to support your answer.

Answer 1

The elements of decision making process.

• Identifying the problem.

This is the process of knowing the details of the problem at hand.This stage tries to answer the questions of whether it is a problem to solve or a question to answer

• Gathering relevant information

Here the decision maker seeks information through research, assessment and other external sources.

Identifying the alternatives

The decision maker tends to find out other options of solving the problem at hand.

• Weighing the evidences

After finding alternatives the decision maker has to weigh the empirical and statistical evidences of all the alternatives.

• Choosing from the alternatives

From among the alternatives and having weighed the evidences,the decision maker has to make a choice.

• Taking action

After weighing and having a choice on which tool to use, the decision maker has to delve into action.

• Reviewing decision

Taking an honest look at the impact of the decision to find out whether the objectives could have been met or not.

Marginal Analysis

This refers to the analysis of additional benefits i.e additional goods and services also putting into account the additional cost bringing about the additional benefits.

Marginal analysis provides the critical information that prompts economic decisions on price and quantity.

Having this information decision such as putting in more capital can be comfortably made.

Through the marginal analysis we appreciate the impact of the law of diminishing returns.

The graph below shows the marginal analysis of production

Marginal product $=\frac{Change in Total Product}{Change in units of Inputs}$

In stage 1there is increasing returns to scale

In stage 2 there is constant returns to scale.

In stage 3 there is decreasing returns to scale.

From the above illustration, the marginal product increases at an increasing rate then starts increasing at a decreasing rate then starts to decline to negative values.