Step 2: Determine the Objective

When it comes to economic decisions, it is a truism that «you can't always get what you want.» But to make any progress at all in your choice, you have to know what you want. In most private sector decisions, the principal objective of the firm - and barometer of its performance — is profit: the difference between the firm's total revenues and its total costs. Thus, among alternative courses of action, the manager will select the one that will maximize the profit of the firm. Attainment of maximum profit worldwide is the natural objective of the multinational steel company, the drug company, and the management and shareholders of Disney, Canon, Time Inc., Texaco, and Pennzoil. Sometimes the manager focuses on the narrower goal of minimizing cost. For instance, the firm may seek to produce a given level of output at the least cost or to obtain a targeted increase in sales with minimal expenditure on advertising. In a host of settings, measures that reduce costs directly serve to increase profits.

The objective in a public sector decision, whether it be building an airport or regulating a utility, is broader than the private profit standard. In making its choice, the government decision maker should weigh all benefits and costs, not solely those that accrue as revenue or are incurred as expenses. According to this benefit-cost criterion, the airport may be worth building even if it fails to generate a profit for the government authority. The optimal means of regulating the production decisions of the utility depend on a careful comparison of benefits (mainly in the form of energy conservation) and costs (in material and environmental terms).

In practice, profit maximization and benefit-cost analysis are not always unambiguous guides to decision making. One difficulty is posed by the timing of benefits and costs. Should a firm (the drug company, for example) make an investment (sacrifice profits today) for greater profits five or ten years from now? Are the future benefits to air travelers worth the present capital expense of building the airport? Both private and public investments involve trade-offs between present and future benefits and costs. Thus, in pursuing its profit goal, the firm must establish a comparable measure of value between present and future monetary returns.

Uncertainty poses a second difficulty. In many economic decisions, it is customary to treat the outcomes of various actions as certain. For instance, a fast-food chain may know that it can construct a new outlet in 21 days at a cost of $90 per square foot. The cost and timing of construction are not entirely certain, but the margin of error is small enough to have no bearing on the company's decisions and thus can be safely ignored. In contrast, the cost and date of completion of a nuclear power plant are highly uncertain (due to unanticipated design changes, cost overruns, schedule delays, and the like). At best, the utilities that share ownership of the plant may be able to estimate a range of cost outcome^ and completion dates and assess probabilities for these possible outcomes. (With the benefit of hindsight, one now wishes that the utilities had recognized the risks and safety problems of nuclear plants 10 and 20 years ago, when construction on many plants was initiated.)

The presence of risk and uncertainty has a direct bearing on the way the decision maker thinks about his or her objective. The drug company seeks to maximize its profit, but there is no simple way to apply the profit criterion to determine its best R&D choice. The company cannot use the simple rule «choose the method that will yield the greater profit,» because the ultimate profit from either method cannot be pinned down ahead of time. In each case, there are no profit guarantees; rather, the drug company faces a choice between two risky options. Similarly, public programs and regulatory policies will generate future benefits and costs that cannot be predicted with certainty.

What is the decision maker's goal? What end is he or she pursuing? How should the decision maker value outcomes with respect to this goal? What if he or she is pursuing multiple, conflicting objectives?

General understanding:

1. What is, according to the author, the difference between the book examples and practice?

2. What role does the problem of definition play for the problem management?

3. What role does context play for problem definition?

4. What is «truism», according to the author?

1. What is the difference between the objective in a public and private sector decision?

What are the difficulties of the decision making?

Английский для Экономистов Агабекян данный файл принадлежит сайту www.crypower.ru ^{Unit_8_Text 1}