To be successful leaders in the global business world of the 21st century, manag
ID: 2495827 • Letter: T
Question
To be successful leaders in the global business world of the 21st century, managers must consider economic trends, behavior, and ramifications of economic decisions. Managers must also balance the pressures to react in the short term and plan for the medium term and long term.
Address the following in detail:
• Describe how economic theories and principles help you think about economic behavior.
• Explain how economic insights are useful in decision making from a personal and business perspective.
Explanation / Answer
What is Economic Theory?
Have you ever wondered why the cost of tea goes up along with the cost of coffee? Perhaps you want to understand why those hard-to-find concert tickets are so expensive? These are the types of things that economists love to explore, and they do so through economic theory. Simply put, the aim of economic theory is to examine the supply and demand of goods and services.
However, before economic theorists can start to examine these situations, there are several underlying questions that need to be addressed. One of the underlying questions is:
How do people go about deciding between different options when making choices about how to spend their money?
For example, let's say that you have saved $15,000 over the last several years, and you now face the decision of what to do with that money - don't we all wish to be in this situation! What theories could help explain how you will choose to spend your money?
One theory might be that your choice on how to spend the money is a random one. Perhaps you will flip a coin and if you get heads you will purchase a new car, and if you get tails you will give the money away to charity. This doesn't seem like a very robust theory, does it? In fact, if choices were random, the theory can't really go any further in explaining how you will choose to spend your money.
Another theory may be that you will choose to spend your money in a way that will be in the best interest of your neighbor. You notice that your neighbor could use a new roof, and you have saved up the exact amount that will buy her a new roof. This theory has some merit. Perhaps you are a very altruistic person and often make decisions based on what is best for others.
However, economists believe there is a reason that better explains why people make the choices they do. From observing people's behavior, economists believe the best theory for why individuals make economic decisions is that they make choices that are in their best self-interest. This is calledrational choice theory.
Rational Choice Theory
Continuing our scenario, rational choice theory states you will make a choice that maximizes your own happiness. For example, you determine that in looking at all of your needs, a new car is your top priority. It is in your best interest to use your savings to purchase this new car. The idea that you make choices that make you better off is the basis of the theory of rational choice.
Behavioral economics, along with the related sub-field, behavioral finance, studies the effects of psychological, social,cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation.[1] Behavioral economics is primarily concerned with the bounds of rationality ofeconomic agents. Behavioral models typically integrate insights from psychology, neuroscience and microeconomic theory; in so doing, these behavioral models cover a range of concepts, methods, and fields.[2][3] Behavioral economics is sometimes discussed as an alternative to neoclassical economics.
The Decision-Making Environment
It is impossible to separate grazing management from ranch or firm management since resources utilized and derived are integral parts of the ranch firm. Grazing management must be viewed in the context of a system comprised of interacting components which can be and are manipulated (Fig. 10.1). Interrelationships among ranch resources, such as people, finances, land, vegetation, climate, animals, and time, as well as activities and external influences must be understood and taken into account by the decision maker. The impact of each decisive action must be evaluated in advance and the outcome monitored. The manager must also be able to anticipate and implement timely changes to optimize decisional outcome. As Wilcox (1982) stated "the successful rancher is that one who can, firstly identify the different factors which will affect operation of the ranch, and secondly, can anticipate the changes in them that will influence his success. This successful rancher is the one who avoids crisis in the running of his enterprise..." No operator should allow himself to get into the crisis situation, but should arrange his management style to anticipate the changes which will be necessary in the operation and make those changes affecting in a timely manner." Likewise, White et al. (1987) stated "This [anticipating change] is an impossible task if the ranch has not developed a logical and practical approach for analyzing information, evaluating plans, and directing daily operations... It is doubtful that any person can accurately assimilate the mass of information and predict the overall ranch outcome without detailed planning and evaluation."
Decision making in grazing management as in any other management occupation requires a strong foundation of technical (cognitive) knowledge enveloped in a functional social knowledge of his/her cultural environment. The quality of the decision depends on the analytic and judgmental skills of a manager. Analysis is a particular type of thinking which transforms one representation into one or more different representations making it easier to perceive particular meanings which were not readily evident in a previous representation (Greenwell 1988).
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