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Chapter 1-3

BUS 207 Chapter Notes - Chapter 1-3: If And Only If, Sensitivity Analysis, Marginal Revenue

Business Administration
Course Code
BUS 207
Karen Ruckman

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Ch. 1 Introduction to Economic Decision Making
- managerial economics = analysis of major management decisions using tools of
- 6 steps to decision making
1) define problem
key part: identifying context
2) determine objective
in most private-sector decisions, profit principal objective
gov decision maker should weigh benefits & costs
2 difficulties: timing of benefits & costs, uncertainty
3) explore alternatives
most decisions should be contingent plans
4) predict consequences
should conditions change, how would this affect outcomes?
likelihood of each outcome, if uncertain?
5) make a choice
in majority of decisions, objectives & outcomes directly
6) perform sensitivity analysis
important to understand & be able to explain why of decision
considers how optimal decision is affected if key economic
facts/conditions vary
- model = simplified description of a process, relationship, other phenomenon
focuses on few key features of a problem to examine carefully how they
work while ignoring other complicating & less important factors
main purpose = explain & predict
account for pas outcomes & forecast future ones
- deterministic model = one in which outcome is certain
- probabilistic model = accounts for range of possible future outcomes, each w/
probability attached
- enumeration = testing number of alternatives & selecting one that best meets the
fine for decisions involving small numbers of choices, but impractical for
more complex problems
- theory of the firm = management strives to maximize firm’s profits
Ch. 2 Optimal Decisions Using Marginal Analysis (p. 27-54)
- marginal analysis = process of considering small changes in decision &
determining whether a given change will improve the ultimate objective
make a small move to a nearby alternative iff move will improve one’s
keep moving in direction of improved objective, stop when no further
move will help
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