1. UNIT -1
BASICS OF MANAGERIAL ECONOMICS
LESSON – 2 CONCEPTS OF ECONOMICS IN DECISION MAKING
What do you mean by decision making?
Well decision making is not something which is related to
managers only or which is related to corporate world, but it is something
which is related to everybody’s life. Whether a person is working or non
working, irrespective of his/her field decision making is important to
everyone.
You need to make decision irrespective of the work you are doing.
As a student also you have to take so many decisions.
Suppose at a particular point of time you want to go for a movie, and at
the same point of you want to go for shopping then what you will do.
You can’t do two things at the same point of time. You have to decide
what to first and what to do next.
Therefore decision making can be called as choosing the right option
from the given one. To decide is to choose. Whether to do this or to do
that is what decision making.
Meaning of decision making:
Decision making is the most important function
of business managers. Decision making is the central objective of
Managerial Economics.
Decision making may be defined as the process of selecting the
suitable action from among several alternative courses of action.
The problem of decision making arises whenever a number of
alternatives are available. Such as :
What should be the price of the product?
What should be the size of the plant to be
installed? How many workers should be
employed? What kind of training should
be imparted to them?
What is the optimal level of inventories of finished products, raw
material, spare parts, etc.?
Therefore we can say that the problem of decision making arises due to
the scarcity of resources. We have unlimited wants and the means
to satisfy those wants are limited,

2. with the satisfaction of one want, another arises, and here arises the
problem of decision making.
While performing his function manager has to take a lot of decisions in
conformity with the goal of the firm. Most of the decisions are taken
under the condition of uncertainty, and involves risks.
The main reasons behind uncertainty and risks are uncertain
behavior of the market forces which are as follows:
The demand and supply
Changing business environment
Government policies
External influence on the domestic market
Social and political changes
Economic problem:
Meaning of Economic problem:
To know the meaning of the term economic
problem we have to put together the four characteristics i.e.
Human wants are unlimited.
Human wants vary in their
intensity.
The means or resources are relatively
limited. There are alternative uses of the
limited resources.
Therefore economic problem can be called as the problem related to the
unlimited wants with limited resources. Problem arises due to this
unlimited wants only. Resources used to satisfy one want cannot be
used to satisfy the other want – it means that every man begins to face
the problem of economizing his means.
The problem of economy is how to use the relatively limited resources
with alternative uses in the face of unlimited wants.
Every try to use his/her limited resources with alternative uses so
that he gets the maximum satisfaction out of his limited resources.
Everyone tries to satisfy those wants which are most urgent or intense
and then those wants slightly less urgent and so on thus sacrificing the

3. satisfaction of those wants which lower on the scale of preference
for which he may not have resources.
This is known as the problem of economy-- - how to make the
maximum use of limited resources.

4. The sources of Economic problem:
Resource sand scarcity:
This is the main source of the economic problem. we
have limited resources and the means to satisfy those resources are very
limited.
Here the resources of the society consists not only of the free gifts of the
nature such as land, forests and minerals, but also of human capacity
both mental and physical and of all sorts of man-made aids to further
production, such as tools, machinery, building etc.
These resources can be divided into three main groups:
1. All those free gifts of nature, such as land, forests, minerals, etc.
are commonly called as natural resources and known to
economists as LAND.
2. All human resources, mental and physical, both inherited
and acquired, which economists call LABOUR.
3. All those man-made aids to further production, such as tools,
machinery, plants and equipments, including everything man-
made which is not consumed for its own sake but is used in
the process of making other goods and services, and which is
known to economists as CAPITAL.
Economics help us in economizing our means. It helps us in
understanding the problem and making the right decision so that
its helpful for the organization for its further planning.
Managerial economic is concerned with decision making at the firm level.
Decision making problems faced by business firms:
• To identify the alternative courses of action of achieving given
objectives.
• To select the course of action that achieves the objectives in
the economically most efficient way.
• To implement the selected course of action in a right way to
achieve the business objectives.
The prime function of management is Decision making and forward
planning. Forward planning goes hand in hand with decision making.
Forward planning means establishing plans for the future.