1. Chapter 1: Introduction to Economic Decision Making Central Proposition: Decision Making Is At The Heart of Most Individual, Business, & Government Problems Important Decisions Warrant Serious Analysis Text Topics 1 Profit Analysis (Chapters 2-6) 4 Decision Making Under Uncertainty (Chapters 12-14) 5. Applications (Chapters 15-17) 2 Market Structure & Competitive Strategy (Chapters 7-10) 3 Regulation and Public Goods (Chapter 11)

2. 1.2 1. Multinational Production and Pricing 2. Market Entry 3.Building a New Bridge 4.A Regulatory Problem 5.An R&D Decision 6.Wooing David Letterman

3. 1. Establishing the Context 2. What is the Objective? 3. What are the Alternatives? 4. Predicting Outcomes 5. Making a Decision 6. Sensitivity (What If) Analysis Who is the decision maker? What is the problem? Maximum Profit or other Goal? Uncovering and maximizing Options Forecasting Revenues and Costs Marginal Analysis, D-Trees, Game Theory What About New Conditions? What Drives Decision? 1.3

4. Firm’s Objective: Maximum Profit Societal Objectives: Maximal Welfare (Benefits - Costs) Government regulatory initiatives and Macroeconomic policies Economic Tradeoffs Benefits versus Costs Long-Term versus Short-Term Risk versus Return Conflicting Goals Automobile Regulation: Safety, Emissions, Fuel Economy 1.4

5. Distinguishing between: Good Decisions and Good Outcomes Decision Steps Assessing Possible Outcomes Quantifying Uncertainty Acquiring and Interpreting New Information Determining whether Risks are Acceptable 1.5

6. Finding the Best Hotel Three Hotels. Traveler can visit and compare but cannot go back. 15 10 10 10 5 20 10 15 | | | | | | | | A B C D E F G H 3.0 3.5 2.0 2.5 4.5 2.0 4.5 What location Minimizes Total Trip Miles? Town E (at the Median of the Customer Distribution) Strategy: Size up the 1st Hotel but bypass it. Stop at the 2nd Hotel only if its better than the 1st. B B M M W W M W B W B M W M W B M B Traveler finds best Hotel 1/2 the time! 1.6