PBD note - Principles of bussiness decisin PDF

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PRINCIPLES OF BUSINESS DECISION

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MODULE 1 INTRODUCTION MEANING OF DECISION MAKING It is the process of selecting best alternative solutions to a business problem from among the various alternative solutions. Thus decision making is goal oriented it arises when there are two or more alternatives. It is an ongoing process. Business managers have to take a number of decisions and their job is perpetually a decision making exercise. DEFINION According to G R TERRY “decision making is the selection based on some criteria from two or more possible alternatives. IMPORTANCE OF DECISION MAKING •

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Proper utilization of resources- it enables better utilization resources such as men ,money, materials, methods and markets for achieving the objectives of an organization. Selecting of best alternatives – before taking a decision the decision maker evaluates the advantages and disadvantages of every alternative and then selects the best alternative. Evaluation of managerial performance- a correct decision indicates that the manager is qualified, able and efficient but a wrong decision indicates that a manager is incompetent to take decisions. Motivation of employees – rational decision motivates employees. Then these are implemented the organization makes high profit.it leads to motivation of motivate the employee both financially and non-financially. Facilitate innovation –rational decisions helps to develop new ideas, new products etc Increase the affiance – rational decision results in higher returns for the firm at allow cost.it leads to increase efficiency. Facing problem and challenges- it helps an organization to face and solve new problems and challenges. 2

• Indispensable element- it is an indispensable element for the success of an organization because all matters relating to management functions are settled through decision made by managers. • Pervasiveness of decision making-it is pervasive in nature in the sense that decision are made in all functional areas. It is spread over many areas of the firm. STEPS IN DECISION MAKING 1. PROBLEM IDENTIFICATION- in this stage of decision-making has to identify and define the real problem is well defined is half solved. 2. PROBLEM DIAGNOSIS - diagnosing problems means that knowing the gap between what is earns and what is ought to be. 3. DISCOVERING ALTERNATIVES- next is to identify various alternatives from among the number sources for solving problem. 4. EVALUATING ALTERNATIVES- It means that evaluating the cost and benefits related with each alternatives. 5. SELECTING THE BEST ALTERNATIVES.- The decision maker can select best alternative based on his experience and research and analysis. 6. IMPLEMENTATION- As first stage of implementation decision and methodology of implementation have to be communicated to those who face problems, and finally required resources should be allocated and assign responsibility to the individual. 7. FOLLOW UP –If there is any deviation between results and objectives the reasons should be analyzed and steps should be taken to correct the deviation. TYPES OF BUSINESS DECISIONS 1.Spontaneous rational decisions- spontaneous are the quick decisions and ,there for the chances of the errors are more, whereas rational decisions are those decisions taken after the logical analysis and study. 2.Programmed and non-programmed decisions – programmed a decisions are taken in accordance with the existing rules and procedures these are simple and are 3

taken by the lower level management. Non programmed decisions are deals with unusual complex business problems. 3.Individual and group decisions- individual decision means that it is taken by a single person whereas group decisions are taken by a group of persons. 4.Short run and long run decisions- when decisions are taken for a short period it is called short term decisions when decision are taken for a long period is called long term decisions. 5.Analytical decisions- it is an approach important business decision.

where a leader or manager makes

DECISIONMAKING ENVIORNMENT 1.Decision-making under certainty- in this case the decision maker has full and needed information to make a decision, that means accurate, measurable and reliable information on which to base decisions available. 2.Decision making under uncertainty- in this case the decision maker is not aware about available alternatives, risk associated with each and consequences. 3.Decision making under risk- it means that the decision maker has adequate information to assign the probability based on past experiences to that happening or non-happening of each possible event. ELEMENTS OF DECISION MAKING 1. Objectives of the decision- it is one of the main element decision making, here no decisions is taken without an objectives. 2. Alternatives –there are different ways and means of finding a solution to business problem. 3.Outcome or payoff- each alternative has its own outcome and payoff. 4. Criteria- decision maker can set evaluation criteria in order to ensure uniformity in the evaluation of alternatives. 5.Decision environment- internal and external forces which influences the decision making process. 4

6.Limiting factor- these are the constraints that prevent a decision maker from achieving the objectives of decision APPLICATION OF ECONOMIC THEORY IN DECISION MAKING 1.Demand theory-demand theory helps a business to understand consumer behavior in terms of changes in demand in response to changes in these factors like prices, consumer income etc. 2.Production theory- it helps a business to understand how much output can be produced from the given combination of inputs. 3.Cost theory- it helps to understand the various concept of cost and its relevance in decision making. 4.Price theory- with the help of this theory a firm can determine equilibrium price and output level. 5.Profit theory- with the help of this theory a firm can determine the concepts of profit ,its functions and its measurement. 6.Theory of capital- it means that allocation various long term investment opportunity a detailed analysis of cost and benefit related to each investment opportunity. 7.Theory of business cycle- business cycle means that recurring up and downs in the level economic activities. It helps to take a[appropriate business decisions. IMPORTANCE OF ECONOMIES CONCEPTS AND THEORIES APPLIED IN DECISION MAKING. 1. Incremental reasoning - the use of incremental concepts in business decisions is called incremental reasoning. Incremental cost is the change in total cost as a result of a change in the nature of busies activities. 2.Concept of time perspectives- on the basis of time it can be divided in to two long run and short run.in the short run output can be increased only by increasing the variable inputs, in the long run output can be increasing both the fixed inputs and variable inputs. 5

3.Discounting principle- it is based on the concept of time value of money, it means that money earned now is more worth than money earned tomorrow. 4.Opportunity cost principle- it means that the same factors of production which are used for the manufactures of a particular product can also be used for the manufacture of another product. The cost of opportunity is foregone is called opportunity cost. While choosing an alternative a decision maker should see that the benefit derived from the chosen alternatives should be more than the opportunity cost. 5.Equimarginal principle- according equimarginal principle allocation of factor inputs will be optimum .when they are allocated in such a way that the value added by the last unit is equal in all cases.

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MODULE 2

DEMAND THEORY MEANING OF DEMAND Demand simply means that willingness to pay a price for a specific goods or services. Holding all other factors are constant, an increase in the price of a goods or services will decrease the quantity demand, and vice versa. Market demand is the total quantity demanded across all consumers in a market for a given good. LAW OF DEMAND The law of demand states that there is a negative relationship between the price of a good and quantity demanded holding all other factors constant. ASSUMPTIONS OF LAW OF DEMAND ➢ ➢ ➢ ➢ ➢

The income of buyers should remain constant The taste and preference of the buyers do not change There is no change in price of substitute goods and complementary goods. Buyers should not anticipate change in price There is no change in number of buyers in the market

MEANING OF DEMAND SCHEDULE Demand schedule is a tabular form for presenting the negative relationship between price and quantity demanded.it is a statement of consumer’s intention to purchase a commodity at different prices. DEMAND CURVE Demand curve is a graphical presentation of negative relationship between price and quantity demanded. If the curve is a straight line slopping downward from left to right to call a linear demand curve. It indicates that change in demand is proportional to change in price.

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REASONS FOR LAW OF DEMAND ➢ INCOME EFFECT- it means that when there is a fall in price, a consumer need to pay a less price for the same commodity so this will increase the purchasing power and increase the income of that consumer. ➢ SUBSTITUTION EFFECT- It is the another reason for downward sloping demand curve. That is the price of commodity increases there is a tendency to substitute more costly products. ➢ LAW OF DIMINISHING MARGINAL UTILITY- Marginal utility refers that if the consumer buys more and more units of the same commodity goes on diminishing, a consumer ready to buy more if it is available at low price. ➢ CHANGE IN NUMBER OF BUYERS-here a fall in price of commodity will attract new buyers this will increase demand of that product. ➢ VARIOUS USES OF A COMMODITY-the various use of same commodity will leads to an inverse relationship between price and quantity demanded. If the commodity will be put to urgent needs only in case of increase in price, and decline in price will be put to less urgent needs. ➢ EXCEPTIONS TO THE LAW OF DEMAND (LIMITATIONS)-in certain situations there is a positive relationship between price and quantity demanded. Following are the situations ➢ Inferior goods or Giffen goods- Giffen goods are those goods which have no substitutes and are consumed by low income consumers and major portion of their income is spent for these goods. ➢ Prestige goods- in this situation consumer measure the utility of a product by its price. That is higher the price of a commodity, higher is the utility and lower the price of a commodity, lower is the utility.

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➢ Consumer expectations-the price quantity relationship will become positive depending on the expectations of the consumer. Consumer will demand more commodity when its price is rising whenever a serious shortage is expected ➢ Change in fashion-if the product become out of fashion, consumer will not ready to buy that product if there is a reduction in price. DEMAND DETERMINANTS ➢ Price of the product-it is the most important factor that determines the demand of a commodity, if the price is low there is less demand and vice versa. ➢ Consumer income-the demand is influenced by the consumers income, if there is an increase in consumer income their demand for commodity increases and similarly a decline in consumer income negatively affect demand. ➢ The price of related goods- related goods includes both substitutes and complementary goods. It means that the demand for one product rises with the rise in price of other product or demand for one product falls with a fall in price of other product. ➢ Amount spent on advertisement-the demand for one product is influenced by the amount spent on advertisement if it is more the demand will be more. ➢ Consumer preference- if there is any change in the taste and preference of the consumer will affect the demand for product. ➢ Consumer expectations- consumer expectation regarding the change in price of commodity influences the demand. The consumer expects an increase in product price in near future they ready to buy more of it now. ➢ Number of buyers in market- if there is an increase in number of buyers in market it will increase the demand and decrease in number of buyers leads to fall in demand. ➢ Money supply- The money supply and demand are positively related.an increase in money supply will increase demand and vice versa. ➢ Taxation policy- taxation policy and demand are negatively related. That is an increase in income tax will reduce the demand and decrease in tax will increase the demand. 9

MOVEMENTS IN DEMAND(price is variable)

EXPANSION OF DEMAND

(When there is an increase in quantity

CONTRACTION OF DEMAND

(when there is a decrease in quantity demand as

a result of decrease in price)

a result of increase in price)

SHIFT IN DEMAND (price is constant)

INCREASE IN DEMAND

DECREASE IN DEMAND

INCREASE IN DEMAND: A rightward shift in demand curve implies more quantities

implies that less quantity are demanded) DECREASE IN DEMAND: A leftward shift in demand curve demanded at a price

remains constant. ELASTICITY OF DEMAND Elasticity of demand refers to the degree of responsiveness of quantity demanded of a product to a change in its determinants of demand. TYPES OF ELASTICITY OF DEMAND 1.Price elasticity of demand Price elasticity of demand refers to the degree of responsiveness of consumers to change in price of a product Price elasticity=

% change in quantity demand % change in price

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1. Perfectly elastic demand –it means that a small change in price will results in an infinite change in demand. Here demand curve will be a horizontal straight line parallel to X axis. 2. Perfectly inelastic- it means that the quantity demanded does not influence any change in price.so here elasticity of demand will be Zero; the demand curve will be vertical straight line parallel to Y axis. 3. Relatively elastic demand- Demand is said to relatively elastic when a change in price results in a more than proportionate change in demand(ie is % change in demand >% change in price) 4. Relatively inelastic demand- Demand is said to relatively inelastic when a change in price results in a less then proportionate change in demand.(ie is % change in demand < % change in price). 5. Unit elastic- Demand is said to be unitary elastic when a change in price results in an equal and proportionate change in demand. (ie is % change in demand= % change in price). MEASUREMENT OF PRICE ELASTICITY 1.point elasticity or percentage methodit is used when price and resultant change in quantity demanded are small and measure elasticity at a particular point of time. 2 . Arc elasticity method- it is used when change in price and quantity demanded are large. 3. Total expenditure method- it consider change in total expenditure on good before and after price change is analyzed, if total expenditure increases as price falls is( elastic), if the total expenditure decreases as price falls is inelastic and expenditure remains same as price changes is unit elastic. FACTORS INFLUENCING PRICE ELASTICITY OF DEMAND Availability of substitutes-the elasticity of product is influenced by the availability of substitutes that means if a product has more substitutes the demand is more elastic.

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Nature of product- elasticity of demand depends on whether the product is a necessary item or luxury item, if it is a necessary item demand is inelastic and in case of luxury item demand is elastic. The number of uses of a commodity- A commodity can be put in to several uses it has an elastic demand. Proportion of total expenditure- A consumer spend higher portion of income on a particular commodity the demand is elastic and if he spend a small portion on a product the demand will be inelastic. Complementary goods- if two goods are complementary, the elasticity of demand of one product depends on the elasticity of demand of another product. Level of prices- there will be inelastic demand in case of high priced and low priced products. Consumer habit- elasticity of a product is greatly influenced by consumers habit.if consumers are habituated a particular product its demand is inelastic. Time factor- the elasticity of demand of a product varies with time available to consumers if longer time is available greater is the elasticity of demand and vice versa. IMPORTANCE OF PRICE ELASTICITY OF DEMAND Determining selling price- price elasticity is an important tool of producer to determine selling price of a product. Here a high price can be fixed for a product with inelastic demand and lower price for a product with elastic demand. To practice price discrimination- it is the practice of charging different price for the same product from different market segments. Helps the government- price elasticity helps the government to decide the indirect tax rates such as sales tax, customs etc to be charged on products. Pricing of joint products- by applying price elasticity the producer can easily fix the prices of joint products. International trade- trade between two countries should make a balance of trade so it can be made favorable to export goods with inelastic demand and imports goods with elastic demand. 12

Controlling business cycle- during the period of boom and depression the government has to implement reduction in tax to stimulate consumption and production. Price elasticity of demand helps to stimulate this one. Economies of large scale production- the producers are eligible to take advantage of large scale production whether the product demand is elastic. INCOME ELASTICITY OF DEMAND Income elasticity of demand refers to the change in quantity demanded of a product as a result of change in consumers income. Income elasticity of demand= % change in quantity demanded % change in income TYPES OF INCOME ELASTICITY Zero income elasticity-it means that a change in income of a consumer causes no change in demanded of a product. Demand curve in this case will be vertical line perpendicular to X axis. Positive income elasticity- it means that an increase in income of a consumer results in an increase in quantity demanded of product. Demand curve will be upward sloping straight line. Negative income elasticity- it means that an increase in income of a consumer results in a decrease in quantity demanded of product. Here demand curve will be downward sloping straight line. IMPORTANCE OF INCOME ELASTICITY Helps in sales forecasting -income elasticity of demand helps to forecast their future sales .if the product has positive income elasticity they can estimate sales depending on the economic condition. Helps in production planning -a business can plan their production with the help of income elasticity of demand. Helps in designing marketing strategies - a producer producing a product with high elasticity 13

CROSS ELASTICITY OF DEMAND -it refers that the relationship between the demand for one product with price of another product (ie is substitutes and complementary goods). It may be defined as the degree of responsiveness of demand for one product in response to change in the price of another product. Cross elasticity of demand between two substitute’s goods is positive Cross elasticity of demand between two complementary goods is negative Cross elasticity of demand= % change in quantity demanded of X % change in the price of Y DEMAND FORECASTING Demand forecasting is the process of making assessment of demand for the product during a given future period in order to make an effective production plan for the period. It simply means that estimation of future demand. NEED FOR DEMAND FORECASTING Production planning- it helps the business to make a production plan for the purchase of materials required for production. Production planning without demand forecasting leads to over and under production. Capital investment decisions- demand forecasting is important for taking capital investment decisions ...