ECONOMICS & BUSINESS

DECISION MAKING

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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

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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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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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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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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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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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Acquiring & Keeping Customers
 Sales revenue comes from
attracting new customers or
having repeat customers come
back.
 Persuading customers to buy
the business’ product in the
first place involves costs such
as:
• Marketing
• Advertising
• Promotion
• Service
• Quality
 Once acquired, customers
have to be persuaded to return
but this also comes as a cost
e.g. providing good customer
care.
 The cost of acquiring
customers is much higher than
keeping them.
 Businesses have to make
decisions on the cost-benefit of
acquiring and keeping
customers.

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 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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 End of Chapter 2

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