ECONOMICS & BUSINESS
DECISION MAKING
For use with Business Economics 2e ISBN: 978-1-4737-2244-6 1Chapter
of 38 2 1 of 11
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
I. The Economics As The Science (Or
Art) Of Decision Making
Scarce resources (demand > supply) +
Unlimited wants and needs =
The need to make rational decisions
between competing choices
For use with Business Economics 2e ISBN: 978-1-4737-2244-6 2Chapter
of 38 2 2 of 11
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The Economic Problem
Scarce Resources – scarce because supply of
them is limited in relation to demand
Wants – things people would like to have but are
not essential for life
Needs – the essentials of life
Competing choices – limited incomes mean all
wants and needs cannot be satisfied
Choices have to be made which involve
costs & benefits
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By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The Effect of Human Decision
Making on Business
Individual make many decisions every day on
purchases.
The combined decisions of these individuals sends
messages to businesses that will affect business
behaviour.
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By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Value for Money
Where satisfaction (utility) > purchase price.
Sellers have to consider value for money
propositions.
Buyers make purchase decisions on basis of
proposition.
A market is when buyers and sellers come together
to agree on exchange.
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By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
II. Business Decision Making
Businesses will make their own
decisions on
How to react or influence consumer demand
How best to organize production to meet demand now
and in the future.
How much to take account of stakeholder interests:
• Stakeholders includes suppliers, employees and the
government.
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By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Investment
Investment is making money available to develop
a project which will generate future returns.
Investment has both costs and benefits to
business.
• Some costs and benefits are internal to the business.
• Some costs and benefits affect stakeholders who are
external to the business.
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Growth and Expansion
Investment decisions
• (plant, equipment, buildings, land) – with a view to
future returns.
Business consumption decisions
• (human resources, raw materials, supplier choice) –
operating inputs.
Risk factor – any business decision involves risk.
Growth & Expansion, internal and/or external
growth.
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By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Acquiring & Keeping Customers
Sales revenue comes from Once acquired, customers
attracting new customers or have to be persuaded to return
having repeat customers come but this also comes as a cost
back. e.g. providing good customer
Persuading customers to buy care.
the business’ product in the The cost of acquiring
first place involves costs such customers is much higher than
as: keeping them.
• Marketing
• Advertising
Businesses have to make
decisions on the cost-benefit of
• Promotion acquiring and keeping
• Service customers.
• Quality
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By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
III. Conclusion
Decisions are made by both consumers and producers.
Collective individual decisions on what to buy sends
messages to producers.
Businesses respond to these messages. Some are
mundane and other strategic.
• Nice weather sees beer sales rise so need to make decisions about getting
stocks out to pubs, restaurants and supermarkets.
• Growth in craft beers sold in the north. Brewer makes decision to develop two
new micro breweries in the north.
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By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
End of Chapter 2
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