MANAGERIAL ECONOMICS

ORIGIN OF THE WORD ECONOMICS

 Economics came from a Greek word oikonomia meaning the one who manages a household.
 Applied to society, economics is the study of how the society manages its scarce resources.

A HOUSEHOLD AND AN ECONOMY FACE SIMILAR DECISIONS

 Who will work?

 What goods and how many of them should be produced?
 What resources should be used in production?
 At what price should be the goods be sold?

CONCEPTS OF ECONOMICS

 Economics is the art and science of choice. In the face of unlimited needs and wants, among the scarce
resources which have alternative uses.
 Resources are scarce and the uses to which they can put to are unlimited. One has to choose the best among the
available alternatives.

10 PRINCIPLES OF ECONOMICS

How people make decision

1. People face trade-offs

 Trade-off is a situation where one loses something in exchange for a gain in another.
 Society faces trade-off between efficiency and equity.
 Society getting the most out its scarce resources (efficiency).
 Distributing economic prosperity fairly among the individuals of the society (effectiveness).

For example, tax paid by wealthy people and then distributed to poor may improve equality but lower the
incentive for hard work and therefore reduce the level of output produced by our resources. This implies that
the cost of this increased equality is a reduction in the efficient use of our resources.

Life example: a student who is faced with a tradeoff between studying for exam or watching a much awaited
movie.

2. The cost of something is what you give up getting it.

 Decisions require comparing the cost and benefits of alternative courses of action.
The cost of going to college for a year is not just the tuition, books, and fees, but also the forgone wages.
The cost of seeing a movie is not just the price of the ticket, but the value of the time you spend in the
theatre.
 This is called opportunity cost of resource.
 Opportunity cost: whatever must be given up in order to obtain some item, or the value of the next
best alternative forgone.
 When making any decision, decision makers should consider the opportunity costs of each individual
possibility.
3. Rational people think at the margin
 Economists generally assume that people are rational.
  Rational: systematically and purposefully doing the best you can, to achieve your objectives.
 Consumers want to purchase the bundle of goods and services that allow them the greatest level of
satisfaction given their incomes and the prices they face.
 Firms want to produce the level of output that maximizes their profits.
 Many decisions in life involve incremental decisions: Should I remain in school this semester? Should I
take another course this semester? Should I study an additional hour for tomorrow’s exam?
 Rational people often make decisions by comparing marginal benefits and marginal costs.
 If the additional satisfaction obtained by an addition in the units of commodity is equal to the price a
consumer is willing to pay for that commodity, he achieves maximum satisfaction, which is the main goal
of every rational consumer.

ACCOUNTING INFORMATION SYSTYEM Introduction to AIS

An Accounting Information System(AIS) is a set of software, hardware, procedures, and people that are designed to
collect, record, process, store, and report financial data

The purpose of an AIS is to provide accurate and timely financial information to internal and external stakeholders to
support decision-making

AISs re used by businesses of all sizes to automate financial processes, reduce the risk of errors, and provide accurate
and timely finane1cial information to stakeholders. The information provided by an AIS is used for decision-making,
financial analysis, and compliance with legal and regulatory requirements.

An AIS can be customized to meet the specific needs of a business and can be integrated with other systems such as
Enterprise Resource Planning(ERP) system to provide a comprehensive view of the organization's financial data.

PRIMARY COMPONENTS OF AIS:

1. Individuals or people - also called as "AIS people", they are considered as the system user various professionals and
organization can make use of an ais including:

• Accountant, auditors, and bookkeepers

• Consultants and specialists

• CFO (chief financial officer)

• Business analysts and project coordinators

• Managers
2. Procedures and instructions - this includes all the method used for collecting, storing, retrieving, and processing data.
The procedures and instructions will be coded into AIS software and series of documentation and proper training will be
"embedded" into employees the procedure in the instructions must be followed consistently in order to be effective.

3. Data - an AIS must have a database structure to store information an example for this is called an SQL or structured
query language. An SQL is a computer language commonly used for databases which allows the data that is in the AIS to
be manipulated and retrieved for reporting purposes. The data contained in an AIS is all of the financial information
pertinent to the organization's business practices. Any business data that impacts the companies finances should go to
an AIS depending on the nature of the business the following data can be included in an AIS:

• sales analysis report (including sales orders and customer billing statements)

• purchase requisitions

• vendor invoices

• check registers

• general ledgers

• inventory data

• payroll information (including timekeeping)

• tax information

Are there any form of data that cannot be found or included in an AIS?

Yes, there is. A few example include memos, correspondence, presentation, and company manuals. These documents
might have a tangential relationships to the company's finances, but, excluding the standard footnotes, they are not
really part of the company's financial record-keeping.

4. Software - before the existence of computers and how this industry has evolved, an AIS was manual and the paper-
based system, but today, the development made, most companies are using computer software as the basis of the
accounting information system. The software components of an AIS is the computer program used to store, retrieve,
process, and analyze the company's financial data.

EXAMPLES OF AIS SOFTWARE USED BY DIFFERENT ORGANIZATIONS:

• intuit's QuickBooks

• sage's sage 50 accounting

• SAP business one

• microsoft dynamics GP

• oracle's PeopleSoft

5. Information technology infrastructure - known as the hardware used to operate the accounting information system
including:

• computers
• mobile devices

• servers and routers

• printers

• storage media

• back-up power supply

A good AIS should also include a plan for maintaining servicing, replacing, and upgrading components of the hardware
system as well as a plan for the disposal of broken and updated hardware, so that sensitive data is completely
destroyed.

6. Internal Control - internal controls are the mechanisms, rules, and procedures implemented by a company to ensure
the integrity of a financial and accounting information, promote accountability and prevent fraud. The internal controls
of an AIS are the security measures it contains to protect sensitive data.

Why is there a need for the presence of an internal control?

An AIS contains confidential information belonging not just the company but also to it's employees and customers such
as:

• social security numbers

• salary and personnel information

• banking and credit card information

• customer-related data

• company financial reports

• financial information of supplier and vendors

Accounting information system functions:

1. To collect and process information

a. This phase involves accumulation of data from areas such as cash sales, cash purchases, receivables, payables, payroll,
invoices, and more (dr and cr)

2. Generate reports for management

a. Decision making procedures of the individuals from the management such as sales and production managers,
financial analyst and under department heads make use of generate reports from an ais to arrive at a final settlement.

3. Interconnect multiple departments

a. An AIS can create a common dashboard for multiple departments that are interrelated. For example, the sales
department can include their sales budget for the inventory team. Then they can take steps to stock products or
purchase materials. Then the respective department will create invoices this information will be available to any
department that needs it.
4. Have control over the circulation of data

a. An AIS helps an organization define who gets how much access to the company's financial data. Hence, getting
incomplete internal control over the data available across the AIS.

5. Detect fraudulent activities

a. Since an AIS keeps track of all the financial transactions of a company, you can easily detect any unauthorized and
unnatural flow of money. This allows businesses to investigate any discrepancy before it's too late. You can save millions
of dollars by investing in a quality accounting information system.

Advantages of accounting information system

1. Automated and streamlined word process

2. Efficient collection and storage of financial information

3. Intelligible data to be used in decision making

4. Internal control over all accounting information

5. Better communication among interconnected teams

6. Improved customer experience

7. Prevention of loss of sensitive information

Limitations and disadvantages of accounting information system

1. Cost of installment and training

2. Obsoletion

3. Manual intervention

4. Confidentiality

5. Virus attacks

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AIS ARCHITECTURE AND INFRASTRUCTURE

AIS ARCHITECTURE – AIS architecture refers to the structure and arrangement of components within an Accounting
Information System(AIS), which includes data input, processing, storage, and output mechanisms designed to support
financial data management and reporting within an organization.

COMPONENTS OF AUS ARCHITECTURE

1. Data input is the process of capturing and entering transactional data into the AIS
2. Data storage involves storing transactional data in databases or other storage systems
3. Data processing encompasses various operations performed on transactional data to generate meaningful
information
4. Information output involves presenting processed data in a meaningful format for decision making purposes
DATA INPUT

It involves various methods such as manual data entry, barcode scanning, electronic data interchange(EDI), and
automatic identification technologies (e.g., RFID)

Data validation and verification procedures are often implemented to ensure the accuracy and integrity of input data.

Examples:

Point -of-Sale(POS) Systems: Retail businesses uses POS systems to record sales transactions, capturing data such as
items sold, quantities prices, and payment methods.

Online forms: Websites and e-commerce platforms collect customer information through online forms including orders,
registrations, inquiries, and feedback.

Barcode scanners: Warehouses and distribution centers use barcode scanners to input data quickly and accurately by
scanning barcodes and products or inventory items.

DATA STORAGE

Relational databases are commonly used for storing structured data, while data warehouses may be used for storing and
analyzing large volumes of historical data.

Data storage solutions must provide security scalability and efficient retrieval mechanism to support the needs of the
AIS.

Examples:

Relational Databases: organizations use relational database management systems like MySQL, PostgreSQL, or Oracle to
support structure transactional data in tables with predefined schemas.

Data warehouses: Companies aggregate and store large volumes of historical transactional data in data warehouses for
analysis, reporting, and decision making purposes.

NoSQL Databases: Some AIS architectures leverage NoSQL databases like MonggoDB or Cassandra to store
unstructured or semi structured transactional data such as log files or social media interactions.

DATA PROCESSING

This includes data manipulation, calculation of financial metrics, aggregation, summarization, and generation of reports.

Data processing may be performed in real time or in batches, depending on the requirements of the organization.

Examples:

Financial Calculations: AIS systems process transactional data to calculate financial metrics such as revenue, expenses,
profits, and cash flows.

Inventory management: AIS systems update inventory levels, track stock movements, and generate reports on stock
levels, reorder points, and stuck outs.

Customer relationship management (CRM): AIS system analyze customer transaction data to identify patterns,
preferences, and trends, enabling personalized marketing campaigns, targeted promotions, and customer segmentation.
Information output

Reports, dashboards, and data visualizations are common output formats use to communicate financial and operational
information to stakeholders.

Information output should be timely, accurate, and relevant to support effective decision making.

Examples:

Financial statements: AIS systems generate financial reports such as balance sheets, income statements, and cash flow
statements to provide insights to an organization’s financial performance.

Management dashboards: Executives and managers use dashboards to visualize key performance indicators(KPIs),
trends, and metrics related to sales, operations, finance, and other areas.

Alert and notifications: AIS systems send alert and notifications to stakeholders for critical events, exceptions, or
threshold bridges enabling timely responses and corrective actions.

DBMS IN ACCOUNTING INFORMATION SYSTEM

DEFINITION AND PURPOSE: A Database Management System (DBMS) is a software that enables users to create,
manage, and manipulate databases. In the context of AIS, DBMS serves as the foundation for storing and managing
transactional data related to business processes. DBMS provides features such as data storage, retrieval, manipulation,
security, and concurrency control to ensure the integrity and consistency of the data.

DATA MODELING AND DESIGN:

• DBMS facilitates the creation of logical and physical data models that define the structure and relationships of the data
stored in the database.

• Data modeling techniques such as Entity-Relationship (ER) modeling and normalization are used to design efficient and
scalable databases.

• DBMS supports the implementation of database schemas, tables, indexes, and constraints based on the data model.

DATA STORAGE AND RETRIEVAL:

• DBMS stores transactional data in tables organized into rows and columns, following the database schema.

• Users can query the database using Structured Query Language (SQL) to retrieve specific data based on predefined
criteria.

• Indexes and optimization techniques are employed to enhance the performance of data retrieval operations.

SECURITY AND ACCESS CONTROL:

• DBMS implements security measures to protect sensitive data from unauthorized access, modification, or disclosure.

• Role-based access control, authentication mechanisms, encryption, and auditing are common security features of
DBMS.

• DBMS ensures data integrity by enforcing constraints, validation rules, and transaction management mechanisms.

DEFINITION, PURPOSE AND SIGNIFICANCE OF DBMS

• DBMS is a software application that allows users to efficiently create, manage, and access databases.

• In the realm of Accounting Information Systems (AIS), DBMS plays a critical role in storing, organizing, and
manipulating financial and transactional data.

• DBMS provides a structured framework for storing data, ensuring data integrity, and facilitating efficient retrieval and
manipulation of information.

• For AIS, accurate and reliable data management is crucial for generating financial reports, conducting analysis, and
supporting decision-making processes.

NOTABLE DATES AND INDIVIDUALS

1. 1960’s-1970’s Edgar F. Codd, an English computer scientist, introduced the relational model for database
management in his landmark paper “A Relational Model of Data for Large Shared Data Banks” published in 1970.

2. 1970’s-1980’s The development of Structured Query Language (SQL) as a standard language for interacting with
relational databases.

3. 1980’s-1990s” Oracle Corporation, founded by Larry Ellison, Bob Miner, and Ed Oates in 1977, grew to become a
dominant player in the database market with its Oracle Database products.

4. 1990’s-2000’s The rise of enterprise resource planning (ERP) systems led to increased demand for robust and scalable
database solutions to support integrated business processes.

5. 2000’s-Present The ongoing development of Al and machine learning technologies is driving innovation in database
management systems, with a focus on predictive analytics, real-time processing, and automation.

ENTERPRISE RESOURCE PLANNING

DEFINITION AND SCOPE: Enterprise Resource Planning (ERP) systems are integrated software solutions designed to
streamline and automate core business processes across departments and functions within an organization.

ERP systems typically cover areas such as finance, accounting, human resources, supply chain management,
manufacturing, and customer relationship management.

KEY FEATURES AND MODULES:

• ERP systems offer a suite of modules or applications that address specific functional areas of the organization.
Common ERP modules include financial management, procurement, inventory management, production planning, sales
and distribution, and customer relationship management (CRM).

• Integration among modules enables seamless data flow and process automation across the organization.

BENEFITS OF ERP SYSTEMS:

•ERP systems help improve operational efficiency, visibility, and collaboration by providing a unified platform for
managing business processes.

• Benefits include streamlined workflows, reduced data redundancy, improved decision-making through real-time
insights, and enhanced customer satisfaction.
ERP systems enable standardization of business processes and compliance with regulatory requirements.

IMPLEMENTATION AND CONSIDERATIONS:

• ERP implementation is a complex undertaking that requires careful planning, stakeholder engagement, and
organizational change management.

• Key considerations include defining business requirements, selecting the right ERP vendor and solution, data
migration, customization, training, and ongoing support and maintenance.

• Successful ERP implementation requires alignment with organizational goals, strong executive sponsorship, and
effective communication throughout the process.

ER Modeling – a method to visually represent the relationship between entities in a database system.

Normalization – this involves breaking-down a database into smaller manageable tables, to structure them in a way that
it reduces duplication which increase data integration.

Role-based access control – a method of restricting system too access authorized user that is based on their position or
role.

Modules – packages or departments within the organization.

TECHNICAL WRITING

Exposition
Is writing technique used by a writer when his/her intention is to:
 Explain something
 Analyze an idea
 Classify a thing
 Give correct definition of a term
 Make others follow directions
 Find out similarities or differences
 Clarify causes and effects
 Present data
 Interpret research work
This is said to be the most utilized form of writing.
Definition
 A useful technique in oral and written communication
 A must for a technical writer to be able to define terms with multiple meanings and those are
unfamiliar to the readers.
Methods of defining terms
Simple definition
 This could be formulated by bearing in mind it's three parts: Species, Genus, Differentia
 This method of definition is commonly used in technical writing weather formally, semi formally, or
non-formally.
 Species - The term to be defined which may be introduced using a determiner
 Genus - The glass/category where the term belongs and is always connected by a linking verb
 Differentia - The characteristics of the term that make it different from other terms belonging to the
same genus
Expanded definition
 Another method of defining a term which is done by explication, cause and effect, classification,
example, and other rhetorical functions
 "Communication is a systematic process in which people interact with and through symbols to create
and interpret meanings"
Informal definition
 This does not follow a pattern
 The only objective is to give meaning to a word that is unfamiliar or explain the special meaning of a
familiar word
 Can be done by giving the denotative meaning and connotative meaning of the word
Pointers when defining terms
 Never give definitions of a term that include any of its derivatives
 Do not use "is where" or "is when" to define a term
 Use the simple present tense (active and passive voice)
 Often we use relative clauses to give additional information
Pointers when defining terms
 Definition is the act of defining
 Christmas is when Jesus Christ is born
 A classroom is where you will find students
 Documentation was the process of acknowledging the sources used in developing a research paper
 The process of acknowledging sources was called documentation
 Documentation is the process of acknowledging the sources used in developing research paper.
Documentation is also another way of helping researchers who may be later on reading your work to
do for the research themselves
Description of a process
 There are writing task that entail and explanation of how something works, how something is done,
and how something is made.
 In describing a process, a writer explains the arrangement of a sequence in chronological order
 The process description includes: SEQUENCE, INSTRUCTIONS, and PROCEDURES.
How to effectively describe a process
1. Avoid ambiguity - When describing steps in a process be, specific. For example, instead of saying "turn
the knob" say "turn the knob clockwise until it clicks"
2. Use active voice - Use active verbs and clear instructions. Active voice makes it clear who or what is
performing the action. For example, "Press the button to activate the system" is clearer than "The
button should be pressed to activate the system"
3. Break the process into steps - Divide the process into distinct, manageable steps. Each step should
describe a single action or decision
4. Number the steps - Numbering helps readers keep track of where they are in the process, especially if
the procedure is complex. If you're describing a multi-step procedure, numbering the steps provide a
clear road map
5. Describe each step clearly - Each step should be brief but complete. Include the necessary actions, the
tools or materials required, and any warnings are important details
6. Use transitional phrases - Connect the steps logically with phrases like "next", "then", "afterwards",
and "finally"
7. While you want to be concise, consistency in how you describe each step is important. Use similar
phrasing for similar actions. Repetition, in this case, can be helpful to reinforce key steps or warnings.
MANAGEMENT SCIENCE

Techniques used in management science

1. Linear Programming. Solves Optimization problems involving constraints (e.g., maximizing profit or minimizing
cost).
2. Queuing theory. Analyzes waiting lines to improve customer service on production efficiency.
3. Decision Analysis. Helps in choosing the best option under uncertainty using tools like decision trees.
4. Inventory Management. Determines the optimal stock levels to minimize costs and avoid shortages.
5. Simulation. Models real world processes to predict outcomes and test strategies.
6. Forecasting. Uses statistical methods to predict future trends and demands.

Applications of management science

1. Operations management
2. Marketing
3. Finance
4. Logistics
5. Healthcare

Benefits of management science

1. Provides a systematic and logical approach to problem solving.

2. Enhances efficiency and productivity.
3. Reduces costs and improves resource utilization.
4. Helps organization to adapt to changing environments.

Conclusion

Management science bridges the gap between theory and practice, helping organizations tackle real world challenges
with advanced analytical tools. It plays a vital role in strategic planning, operational efficiency, and decision making
across industries.

PROBABILITY AND CONCEPTS

Probability is the chance of something happening.

-fraction, decimal, or percentage

-it ranges from 0 – 1

0 = can never happen

1 = will occur with certainty

The probability of single event A may be written symbolically as P(A) read as “probability of event A happening”

BASIC PROBABILITY CONCEPTS

Single probability
  Only one event can take place
 Marginal or unconditional probability

Sample space

 The set of all possible outcomes of an experiment

 Experiments involving a toss of a coin, drawing cards from a deck, rolling a die

Event

 A possible outcome of an activity

Experiment

 The activity that produces an event

The probability that an event will happen plus the probability that an event will not happen is equal to 1.

MUTUALLY EXCLUSIVE EVENTS

Events are mutually exclusive if one and only one of them can take place at a time.

If two or more events occur at a time, then the events are non-mutually exclusive.

THREE APPROACHES TO PROBABILITY

1. SUBJECTIVE PROBABILITY
 Based on the personal belief or feeling of the person making the probability estimate.
 It may also be based on individual experience or perception.
 It is the probability assigned to an event on the basis of whatever evidence is available.
2. RELATIVE FREQUENCY PROBABILITY
 The probability event may also be determined through relative frequency of past occurrence
 The defining probability is either
a. The number of times that an event occurs in the long run under a condition of stability
b. The observed relative frequency of an event involving a very large number of trials.

+ to use this approach, the decision maker must have a past record of events and determine how often an event
has happened before.

3. CLASSICAL APPROACH
 In the classical approach, an experiment is performed
 The possible outcomes can be predicted even before the performance of the experiment
 One of the assumptions in this approach is that the probabilities of each possible outcome must be equal
P(A) = n(A)/n(S)
N(A) = number of possible event A outcome
N(S) = total number of possible outcomes in the sample space

Step 1: Determine the total number of possible outcomes in the sample space

Step 2: Define the event by determining the number of possible outcomes

Step 3: find the probability using the equation

USES OF COMBINATION IN PROBABILITY

Combination is defined as the arrangement of grouping of objects without taking consideration their order. The formula
for the combination of n objects taken r at a time is expressed as: nCr = n!/(n-r)!

ADDITION RULE FOR MUTUALLY EXCLUSIVE AND NON-MUTUALLY EXCLUSIVE EVNETS

Two events are mutually exclusive if both cannot occur at the same time. This means that at least one of the event A or
B will happen. When two events are mutually exclusive, the probability of two events is symbolically denoted by:

P(A or B) = P(A) + P(B)

It is known as the addition rule for the probability of mutually exclusive events.

When event A or B are not mutually exclusive, this means that both events A and B may occur at the same time, the
probability is denoted by: P(A or B) = P(A) + P(B) – P(A and B)

P(A or B is the probability of A or B happening when A and B are not mutually exclusive.

P(A) is the probability of A happening.

P(B) is the probability of B happening.

P(A and B) is a probability of A and B happening together

CONDITIONAL PROBABILITY

 the chance that a second event will occur once prior event has already happened
 Symbolically written as P(A|B), read as “the probability of event A given that B has already happened.

There are instances when the conditional probability of event A (given that event B has occurred) is the same as the
unconditional probability of A. This is because they are independent.

INDEPENDENCE may be expressed as “no event is affected by the events preceding it.” In fact, it is symbolically defined
as he condition in which: P(A|B) = P(A)

JOINT PROBABILITY AND MULTIPLICATION RULE

The formula for joint probability is read as:

“The joint probability of events A and B equals the probability of event A happening given that event B has occurred,
multiplied by the probability of event B happening.”

This implies that events A and B will both occur. If the occurrence of A does not affect the probability of occurrence of
event B or vice-versa, then A and B are independent events; otherwise, they are dependent.

BINOMIAL PROBABILITY

Some events can happen in two ways, either as a success or as a failure and either occurring or not occurring.
p = probability of success

q = probability of failure

Since there are only two outcomes which can be considered, the binomial theorem may apply.

SIMULTANEOUS EQUATIONS AND INEQUALITIES

SIMULTANEOUS EQUATIONS AND INEQUALITIES - are two types of mathematical problems where you solve for
variables that satisfy multiple conditions at the same time

SIMULTANEOUS EQUATIONS - are sets of two or more equations with multiple variables, solved together to find
common values

A system of equations can be classified as consistent or inconsistent based on whether it has solutions.

A. Inconsistent System
 system of linear equations with no solutions
 the graphs of equation in this system is consist of parallel lines
 the slope of the equations are the same, but the y-intercepts are different
B. Consistent System
 it has at least one solution
i. Independent System
 system of linear equations with only one solution
 the graphs of these equations intersect at exactly one point
ii. Dependent System
 system of linear equations have infinitely many solutions
 the equation represent the same line (one is a multiple of the other)

SOLUTIONS OF SIMULTANEOUS EQUATIONS

The four ways or methods of solving simultaneous equations are:

1. Elimination by addition or subtraction

2. Substitution

3. Combination of elimination and substitution

4. Graphical solution

1. Elimination by addition or subtraction

 multiply or adjust the equations to cancel out one variable
 solve for the remaining variable
 substitute back to find the other variable
2. Substitution
 solve one equation for one variable
 substitute into the other equation
 solve for the remaining variable
3. Combination of elimination and substitution
  use the elimination method to eliminate one variable
 substitute the found variable into the original equations
 solve for the remaining variable
4. Graphical Solution
 plot both equations on a graph
 the intersection point gives the solution

LINEAR INEQUALITIES IN TWO VARIABLES

While EQUATION is a statement connected by an equal sign (=), INEQUALITIES are also mathematical statements
connected by symbols such as >, <, >, <.

Inequalities may contain one, two, three, or more variable.

When there are two variables involved, two inequalities are needed to solve for x and y. The area bounded by these two
inequalities is the solution set of the given linear inequalities in two variables. Since the solution of inequalities is
composed of areas bounded, the best way to solve it is by graphing.

SIMULTANEOUS INEQUALITIES

SIMULTANEOUS INEQUALITIES - involve finding a range of values that satisfy multiple inequalities at the same time

Steps:

1. Convert to equalities for graphing.

2. Find boundary lines.

3. Shade the valid region that satisfies both inequalities.

4. Find overlapping solution sets.

PAYOFF DECISION TABLE

A decision analysis tool that summarizes pros and cons of a decision in a tabular form. It lists payoffs (negative or
positive returns) associated with all possible combinations of alternative actions (under the decision maker's control)
and external conditions (not under decision maker's control)

Also called Payoff Matrix

DECISION RULES

 The maximax rule for an optimist - i.e. someone who wants the best possible upside potential without being
very concerned about possible losses or downside. (Optimistic Approach)
 The maximin rule for a pessimist looking to minimize his losses - i.e. someone who wants to minimize the
potential downside exposure.
 The minimax regret rule is for someone who doesn't like making the wrong decision. This approach seeks to
minimize such "regret".

Alternatively, expected values of profits could be used to make a decision. These are averages and essentially ignore
the spread or risk of outcomes. Risk must thus be brought back into the decision making process another way.
THE VALUE OF PERFECT INFORMATION

Information - Decision makers may be offered a forecast of a future outcome. This forecast may turn out to be
correct or incorrect.

 Perfect information - The forecast of the future outcome is always a correct prediction. If a firm can obtain a
100% accurate prediction they will always be able to undertake the most beneficial course of action for that
prediction.
 Imperfect information - The forecast is usually correct, but can be incorrect. Imperfect information is not as
valuable as perfect information.

The value of information (either perfect or imperfect) may be calculated as follows: Expected Profit (Outcome)
WITH the information LESS Expected Profit (Outcome) WITHOUT the information