Question

Following are examples of typical economic decisions made by the managers of a firm. Determine whether each is an example of what, how, or for whom. a. Should the company make its own spare parts or buy them from an outside vendor? b. Should the company continue to service the equipment that it sells or ask customers to use independent repair companies? c. Should a company expand its business to international markets or concentrate on the domestic market? d. Should the company replace its own communications network with a "virtual private network" that is owned and operated by another company? e. Should the company buy or lease the fleet of trucks that it uses to transport its products to market?

Short answer

a. How, b. How, c. For whom, d. How, e. How.

Step-by-step solution

Analyzing Decision a

Determine whether the decision about whether to make spare parts or buy them is related to the type of goods and services to produce (what), or the methods of production (how), or the distribution of goods and services (for whom). This decision is about the methods of acquiring a component for the production process, so it relates to 'how' goods and services are produced.

Analyzing Decision b

Deciding whether the company should continue to service equipment or outsource it involves considering which method is more efficient or beneficial, which is a 'how' decision. It relates to the method of providing after-sales service.

Analyzing Decision c

Determining if a company should expand to international markets or focus on the domestic market involves deciding on the target audience for their products, which is a decision about 'for whom' the goods and services are provided.

Analyzing Decision d

Deciding whether to replace the company's communications network with a virtual private network concerns the method of handling communications, which is a 'how' decision. It involves choosing between different technological means for achieving a task.

Analyzing Decision e

The choice between buying or leasing a fleet of trucks involves evaluating the best approach to obtaining and managing assets necessary for delivering goods, which is again related to 'how' the goods and services are distributed.

Key concepts

Economic Decision Making

The art of economic decision making is essential for the effective management of a firm. It involves choosing among alternatives in order to achieve the best possible outcomes with limited resources. For example, managers grapple with decisions on whether to manufacture components in-house or procure them from external sources. This reflects a fundamental 'how' decision, as it pertains to the methods by which goods and services are produced. The efficiency gains or losses from such decisions can have a significant impact on a firm's competitiveness.

Likewise, when considering whether to provide their own after-sales services or to contract out, managers are weighing the pros and cons of different service delivery methods. Through careful analysis, they aim to find solutions that maximize benefits not just for the company, but for customers as well. In essence, economic decision making is about aligning business activities with strategic objectives, ensuring resource optimization and customer satisfaction.

Methods of Production

The methods of production represent the various approaches and techniques firms can employ to create goods and services. These methods often involve decisions about the use of technology, labor, and materials. Regarding the provision of in-house services versus outsourcing, selecting the right method can significantly affect cost efficiency, quality control, and flexibility.

From a practical standpoint, contemplating whether to purchase or lease a fleet of trucks involves analysis of different production methods. Companies must consider the upfront costs, maintenance responsibilities, and long-term financial implications. Each choice has its own set of trade-offs between costs, risks, and control over the production process. Fostering an understanding of these trade-offs is crucial for students and can be improved through exercises that prompt them to think through the downstream effects of each production method on the firm's operations.

Market Expansion Strategies

Deciding whether to venture into international markets or focus on domestic audiences falls under market expansion strategies. These strategies are vital for firms intending to grow and increase their market share. It's a 'for whom' decision, involving the identification and targeting of new customer bases.

Expanding into a new geographical market requires due diligence on cultural differences, regulatory environments, and competition. It also involves strategic considerations such as pricing, branding, and product adaptation. This type of decision is complex, as it requires understanding both the potential rewards and the risks involved. For companies, the choice to go global is not merely about crossing borders; it's about creating a presence and delivering value in a completely new market environment. Students learning about these strategies should consider the long-term implications on the firm's reputation, revenues, and competitive stance in all served markets.