Question 1 Business decision-making is an economic process. Analyze this statement with the help of examples.

Business Decisions making Economic :-Micro Economic and Macroeconomics Business Decision in context with Economics Case study Conclusion.

Business Decisions Making

In the words of George R. Terry, "Decision-making is the selection based on some criteria from two or more possible alternatives". As Simon states: Most human decision making, whether individual or organizational, is concerned with the discovery and selection of satisfactory alternatives; only in exceptional cases is it concerned with the discovery and selection of optimal decisions. (Simon, Administrative Behavior.) As conclusions with the definition of above authors Decision can be defined as Choosing an appropriate alternative among the possible alternative to achieve desired result or solution. A Business firm thinks seriously about the optimum allocation of resources because resources are limited in supply and most resources have alternative uses. The firm therefore intends to get best out of given resources or to minimize the use of resources for achieving a specific target

Economics: Micro Economics and Macro Economics In order to understand economics, we first need to understand (1) the concept of scarcity and (2) the two branches of study within economics: microeconomics and macroeconomics.

1 .Scarcity Scarcity refers to the tension between our limited resources and our unlimited wants and needs. For a Business firm, resources include capital, human resource and assets. For a country, limited resources include natural resources, capital, labor force and technology.

Because all of our resources are limited in comparison to all of our wants and needs, individuals and nations have to make decisions regarding what goods and services they can buy and which ones they must forgot. For example, Business needs an expansion , which in turn requires enhancement of technology which needs capital, in order to expand you need capital investment so scarcity in capital will lead to a decision making process where board member will decide the source from where capital can be arranged. Of course, each individual and nation will have different values, but by having different levels of (scarce) resources, people and nations each form some of these values as a result of the particular scarcities with which they are faced. So, because of scarcity, people and economies must make decisions over how to allocate their resources. Economics, in turn, aims to study why we make these decisions and how we allocate our resources most efficiently. 2. Macro and Microeconomics Macro and microeconomics are the two vantage points from which the economy is observed. Macroeconomics looks at the total output of a business firm and the way the firm allocates its limited resources of land, labor and capital in an attempt to maximize production levels and promote trade and growth for future generations. After observing the society as a whole,

Macroeconomics is the study of the behavior of the economy as a whole. This is different from microeconomics, which concentrates more on individuals and how they make economic decisions. Macro economy is very complicated and there are many factors that influence it. These factors are analyzed with various economic indicators that tell us about the overall health of the economy. Macroeconomists try to forecast economic conditions to help firms and governments make better decisions.

Businesses use macroeconomic analysis to determine whether expanding production will be welcomed by the market. Will consumers have enough money to buy the products, or will the products sit on shelves and collect dust?

Governments turn to the macroeconomy when budgeting spending, creating taxes, deciding on interest rates and making policy decisions.

Macroeconomic analysis broadly focuses on three things: national output (measured by gross domestic product (GDP)), unemployment and inflation. Business Decision Making in Context with Economy: The process by which businesses make decisions is as complex as the processes which characterize consumer decision-making. Business draws upon microeconomic data to make a variety of critical choices, any one of which could mean the success or failure of their enterprise. The reliability and currency of the information a business uses, therefore, is of the utmost importance. What a business does with that data is decided by senior and top management.

The major influences on their decisions may entail some or all of the following factors:

logic what the competition is doing the state of the economy

Logic Microeconomic data may be reduced to mathematical constructs from which logical decisions may be made. Let's say we have a theoretical company, Firm A, which manufactures and sells clothing. Microeconomic data from this imaginary company has shown that its customers have a preference for navy blue, buttondown shirts at a certain price. The previous year the company sold 50,000 shirts at $20 each. For the sake of argument, let's say that this year the economy has not changed. The gross national product (GNP), unemployment rates, interest rates and the stock and bond markets are all basically the same as the previous year. Logic would dictate that at least another 50,000 navy blue, button-down shirts be manufactured and offered for sale. What the Competition Is Doing Firm B, which competes with Firm A, is selling a shirt this season which is similar in style and quality to the shirts of Firm A. But Firm B's shirt is being offered for sale at $2 less, a 10% discount from Firm A's $20 shirt. Microeconomic theory holds that a price reduction should increase demand. If the price of Firm A's shirts is reduced to less than what Firm B's shirts are selling for, then theoretically, Firm A's shirts would outsell the competition.

It's reasonable to assume that these are the topics of discussion at the highest management levels of the company, Firm A, when the executives meet to make a decision on this issue. However, another factor is introduced before a final decision is made on the number of shirts to be made and at what price they will be sold for in the market Firm A's vice president in charge of marketing and advertisings asks a pertinent question: What if Firm an increases its marketing and advertising budget by 5% rather than reduce its profit margin by 10%? Would the increase in marketing and advertising of blue shirts sell more shirts, and therefore meet or beat the competition? Microeconomic data has shown that in some cases a vigorous ad campaign is often a successful way to beat the competition.

State of the Economy Now another perplexing question is asked by the vice president, chief financial officer (CFO). The economy is good at the moment, but leading economic indicators forecast a downturn in the fourth-quarter of the year - the quarter that includes the Christmas season during which a large percentage of a firm's annual sales occur. Although the economy in general is subsumed by macroeconomics, its impact on the microeconomy must often be taken into account in the decisionmaking process.

Variables and Unknown Factors These may include a consumer desire for something new. They may inexplicably tire of blue shirts and prefer another color. Or perhaps the blue shirts made by firm are so durable that the shirts bought the previous year have not worn out and consumers don't need new shirts this year.

Taste-makers and fashion trend-setters in the entertainment industry, media, or in the world of sports celebrity, may show a preference for green shirts rather than blue shirts. Consumers who are influenced by these trend-setters may buy more green shirts than blue shirts, thus leaving Firm A with a surplus of unsold blue shirts. Firm A may recover some of its costs by offering blue shirts at a steep price discount. But this, of course, hurts the perception of quality associated with the Firm A brand. All of these elements - the microeconomic data, the questions it provokes, the possible outcomes of each choice made in the decision-making process - are what business executives must consider to assure the success of their companies and maximize their profitability. Example lets take an even closer look now at this shirt manufacturing firm. First, it's just one of many competing firms selling shirts. Each of these firms is determined to maximize its profits. Each firm is also aware that beyond a certain number of shirts produced and sold, the cost of manufacturing just one more shirt and selling it returns no more income to the firm than the cost of manufacturing the shirt. In other words, no matter how many shirts are sold over a certain level of units, the firm is breaking even because costs equal revenues; in other words, there is no profit.

Because Firm A, the shirt maker, competes against many another shirt makers, it's involved in what economists describe as "perfect competition." This means that the many competitors are making the same or a similar product, and each of them has only a small fraction of the total market.

In a perfect competition environment, shirt manufacturers have little or no control over pricing. The price of a shirt is fixed at the intersection of the market demand curve and the market supply curve. Companies in these circumstances are referred to by economists as price takers - their pricing is a take-it-or-leave-itproposition, and they almost always take it. They can't charge less because profits will be impacted. They can't charge more because sales will decline, which affects profits. This business reality leaves competing firms one option: how many shirts to manufacture, a decision which will also affect their profits. The total cost of production subtracted from total sales revenue leaves total profit. It is therefore critical that firms manufacture and sell the right number of shirts. Because the cost of manufacturing each shirt increases as more shirts are made, a theoretical point is reached where making more shirts eats into profits and eventually causes a loss. Assuming the market price for shirts is high enough, a firm will make a profit when its marginal revenue is equal to its marginal cost. Marginal revenue is the increase in total revenue a firm would receive from the sale of one extra unit. Marginal cost (MC) is the total cost to a firm by producing one extra unit. In the case of Firm A, which makes shirts, or for any firm no matter what it makes, if manufacturing and selling a single unit of a product costs less than the revenue it brings in, then the smart decision is to produce and sell the product. If the cost of producing and selling a product is more than the revenue, a firm should stop producing it. Opportunity Costs and Accounting Concerns Accountants and economists each have unique ways of calculating costs. The accountant calculates actual money paid out as costs. These include fixed costs

such as rent, which remain the same contractually for a specific time period, and variable costs such as labor and raw materials.

An economist uses additional factors as costs, including opportunity costs, the tradeoff concept described in the previous chapter. The opportunity cost is the cost of giving up one thing for another. In business, an opportunity cost might be accepting a temporarily smaller profit or a slight loss in return for remaining in business, keeping a manufacturing plant open, retaining personnel, or similar tradeoffs. The relationship between fixed and variable costs and revenues determines whether a business should shut down certain operations for a short period, or for a long period when total costs are more than total revenues. Conclusion These are the decisions that must be made by a firm's top management using microeconomic data and formulas. The decision-making processes are determined by analysis of the information, and then choosing the best-case scenario. More often than not, senior managers make the right decisions. Its not unusual, however, for top managers to make a wrong decision, and sometimes a series of wrong decisions that may eventually prove fatal to their companies.