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Business and economics: problem solving
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Explains problem solving within economics and provides written example plus exam question
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25.09.19 Managerial economicsBusiness and economics
The art of business
o The art of business: identify assets in low valued uses and devise ways to profitably move
them to higher value uses.
Example of Uber – optimising use of a product or service to maximise profitability.
o Model: way of simplifying the world
o Company: an organisation that makes a series of transactions.
o Reward employees who enable profitable transactions and stop unprofitable ones – Well
designed organisation
o Economics can enable companies to become more profitable.
o Economics: study of incentives; requires a model of human behaviour to understand how
people respond when confronted to a range of decisions.
The rational actor paradigm: (RAP-Model of behaviour)
- Used to analyse behaviour: suggesting why but also motivators.
- Assumes people act rationally, optimally and out of self-interest.
- To change behaviour, you must change incentive.
- Simplifies human behaviour to align interests with the company via a reward management.
- Incentives can include pay, removal of benefits etc…
- A powerful way to make progress during stagnant periods.
- E.G taking undervalued workers/assets and utilising them for higher value purposes.
o Performance evaluation metric: Incentives can be created by rewarding good behaviour.
- This can incorporate a reward structure (promotions, commissions etc…)
Business problem solving
o 2 distinct steps of the problem-solving algorithm:
- Figure out what is wrong
- Figure out how to fix it
o These steps require a model of behaviour.
o The RAP states that mistakes are made because of either: bad incentives or a lack of
information.
o Training can act as a source of information and can prevent mistakes occurring.
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