DECISION-MAKING ANALYSIS TOOLS
Introduction
Microeconomics is a branch of economics where we study the individual and firm behavior. In microeconomics, we are concerned about demand and supply, the behavior of the consumer or the producer, and how they will make the pricing decision. Individuals will react differently to different products when the prices of the products changes. This response to the difference in price or any factor affecting demand or supply is known as elasticity.
It plays a significant role in the economy because this knowledge is used by producers to price the products. The government will benefit from this information when it comes to charging the income tax. In microeconomics, the firm will study how they will determine the optimal production and the best prices in different market structures. Therefore, microeconomics is an essential study of social life. In this essay, we shall focus on the microeconomics, where we shall use the concept of opportunity cost to make the decision. We shall apply the knowledge of elasticity to predict the change in demand. It will help us to use marginal costing in making the decision.
Application of information about elasticity of demand in decision making
In elastic demand, the change in quantity demanded of the goods is more significant than the change in price. This means that an elastic product is highly sensitive to prices. It means that the consumers will tend to buy more when there is a small decrease in prices, and they will decrease their purchases drastically when there is very little increase in prices. When a mathematical approach has used the coefficient of elastic demand is negative and greater than one. The coefficient is negative because the demand curve is downward sloping.
In the inelastic demand, the change in quantity demanded is smaller than the change in price. The quantity demanded will not be much affected by the price change. The change in price is less sensitive to the quantity demanded. The coefficient of the inelastic demand is less than one. It means that a big change in price will result in a minimal change in quantity demanded.
In the pricing decision, the knowledge of elasticity is essential. The decision-maker should not increase the prices of the commodity, which is price elastic. The increase will result in a drastic decrease in the quantity demanded, although the price change was minimal.
The producers should increase the prices of commodities with inelastic demand if they want to set a price that will maximize the profits. The government usually increases the commodity tax when it wants to increase its revenue. These taxes should be used on the commodities which are price inelastic. The agricultural products are price elastic, and therefore the government should not tax the products because the tax will make their prices increase and hence reducing the quantity demanded. The government should subsidize the commodities to show that to enhance the increase in their demand (Gibson & Kim, 2019).
Marginal analysis and decision making
Decision making is the process of choosing an alternative. The decision-maker will evaluate the available decisions and then make a choice. In economics, the producers and the consumers are faced with difficulties in making the decision, especially when they want to determine the point of maximizing their profit or satisfaction. The marginal analysis technique is mostly used in decision making.
In the marginal analysis, the decision-maker compares the incremental benefits accruing from the commodity and the additional cost generated. In microeconomics, the marginal analysis can be used to evaluate the effects of small changes in the production cost and the total output. The term marginal in economics refers to additional. This analysis concept can be used by individuals and the firm in decision making (Marques & Pascoal, 2018).
Using the principle of consumer behavior, the consumer will maximize satisfaction when the ratio of marginal utility of the two commodities will be equal to the ratio of their prices. In other words, the point of equilibrium of the consumer is where marginal utility is similar to the product’s price. Marginal utility is the additional utility the consumer will get when they consume an extra unit of the product. The marginal utility diminishes as the consumer continues to increase the consumption of one commodity only.
The producers will use the marginal analysis concept to help them maximize profits. They can use the idea when they want to expand their plant or introduce a new product. In this case, they will analyze the marginal revenue and marginal cost of either expanding or introducing the product. Marginal revenue is the additional revenue the firm will get when they sell an additional unit of the product. At the same time, the marginal cost is the extra total cost a firm will incur when it produces an extra unit. According to Dolzhenkova & Iurieva (2017, June), the firm will maximize the profit when the marginal revenue is equal to the marginal cost of production.
The theory of marginal analysis has been critical in decision making because it will lead to optimal decision making, where one is constrained with preferences or resources. It is also useful because the marginal analysis results are similar to the decisions made by the individuals.
Importance of opportunity cost in decision making
The term opportunity cost arises due to scarcity. Scarcity occurs where the available resources are less than the demanded resources. When individuals make a choice, they will forego other alternatives. The benefits of foregone decisions are known as opportunity costs. The choice of an option is the decision making, and therefore, it is critical to evaluate the opportunity cost before a decision is made. The decision-maker is supposed to compare the extra benefit of the choice made and the opportunity cost. The analyst should make a choice that will have a higher marginal befit than the opportunity cost. According to Raboy (2017)., the concept of opportunity cost and marginal analysis has been of great importance in deciding the business opportunities to pursue. This concept can also help to overcome the scarcity of resources. The business persons will always find the solution to overcome resource scarcity.
References
Dolzhenkova, E., & Iurieva, L. (2017, June). Concept of Lean Production Using Marginal Analysis in Conditions of Innovation Economics. In International Conference on Trends of Technologies and Innovations in Economic and Social Studies 2017. Atlantis Press.
Gibson, J., & Kim, B. (2019). The price elasticity of quantity, and quality, for tobacco products. Health economics, 28(4), 587-593.
Marques, J., & Pascoal, R. (2018). Mathematical Economics-Marginal analysis in the consumer behavior theory.
Raboy, D. G. (2017). An introductory microeconomics in-class experiment reinforces the marginal utility/price maximization rule and the integration of modern theory. International Review of Economics Education, 24, 36-49.