Give two real life examples of how economics can be used to improve decision-making with original examples
Give two real life examples of how economics can be used to improve decision-making with original examples not found in the textbook. Explain how following the three step approach can be used 1. Who is making bad decisions? 2. Does the decision maker have enough information to make a good decision? 3. The incentive to do so? (In 300 words)
The first example is the use of elasticity of the demand by companies in deciding their prices of the product. Pharmaceutical products such as medicines are relatively inelastic in nature. So, prices of medicines do not significantly affect the demand. Here, economics concept is used to take a confident decision related to the price and distribution of the product.
The second example is the selection of market structure according to the value proposition of the product among consumers. iPhone is the product that is known for its superior and distinguished features. So, the parent company operates in monopolistic competition and opts for value based pricing that is much higher than the cost of manufacturing of the product. Here, economics is used to gain bargaining power in the market and it is helped by the value associated with the product.
The three step process is used to evaluate and analyze the decision.
The first step is used to identify the decision and the process taken up to reach on a decision. Any decision based upon only gut feeling or marketing myopia without any rational approach will lead to the bad decision.
The second step deals with the necessary information available to the decision makers. It requires an information system that consists of quantitative data as well as qualitative information. It helps in taking a rational and optimum decision of:
1. What to produce
2. How to produce
3. How much to produce
4. Where to produce
5. The most suitable market for sales and pricing strategy
The third step deals with the incentive such as stock option plans, bonus and profit sharing agreement. It prevents any agency conflict also. Therefore, the three step process prevents any moral hazard and encourage managers to take an informed decision of for the benefits of all the parties.