Decision Making in Economic Analysis

1160 WordsFeb 7, 20065 Pages
An explanation of how decision-making is dealt with in economic analysis requires an examination of the main factors at play. These factors amongst others are looked at as a base for decision making. Supply and Demand are the most fundamental tools used in economic analysis. I will explain what demand is and how the demand curve is derived. I will also write about Supply and its relationship with Demand. I will examine equilibrium price (market clearing price) and how we can calculate or plot it. I will attempt to show how market surpluses and market shortages are caused and their effect on product prices. Factors of cost and the decisions regarding cost will be covered. I hope to covey how cost is correlated with price which in turn is…show more content…
The main costs of production are raw materials, research and development, manufacturing of the product – wages, shipping, advertising and retail costs. Management will look at all of these factors and will try to get the best quality for the lowest price. They will need to predict the implicit and explicit cost and outcomes of the choices they make. The choices of what to pay for raw materials are very important. For example, the upside of buying cheap materials will mean less economic costs. However, the consumer might see a drop in quality of the good and buy less, leading to decreased profit. A balance must be found. R & D for a product is crucial to its success in the market. Constant development updates and improvements of a product will widen its life cycle in the market. A firm 's location is a big factor of costs. Needs of the firm such as infrastructure, a labour force and machinery costs have to be factored into decision making. Marginal analysis is a technique widely used in business decision-making. It ties together much of economic thought. Marginal analysis is used to assist people in allocating their scarce resources to maximize the benefit of the output produced. Put simply it is getting the most value for the resources used. For example, If a company was to increase it 's output by one unit (marginal unit) would they reap the value or more of that unit
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