Decision Making & Problem Solving in Business

Decision Making and Problem Solving

Defining the Process

Problem Solving: Identifying the difference between the actual and desired state of affairs, and taking action to resolve the difference.

Decision Making: Defining the problem, identifying alternatives, determining criteria, evaluating alternatives, and choosing an alternative.

Types of Decision Problems

Single-Criterion Decision Problem: Finding the best solution based on one criterion.

Multicriteria Decision Problem: Finding the best solution considering multiple criteria.

Key Concepts in Decision Making

Decision: The selected alternative.

Model: A representation of a real object or situation.

• Iconic Model: A physical replica of a real object.
• Analog Model: A physical representation, but doesn't resemble the real object.
• Mathematical Model: Uses mathematical symbols and expressions to represent a real situation.

Constraint: A limitation imposed on a problem.

Objective Function: The mathematical expression to be maximized or minimized.

Uncontrollable Input: Factors beyond the decision maker's control.

Controllable Input (Decision Variable): Alternatives specified by the decision maker.

Deterministic Model: All uncontrollable inputs are known and constant.

Stochastic (Probabilistic) Model: At least one uncontrollable input is uncertain and variable.

Optimal Solution: Decision variable values that yield the best output.

Infeasible Solution: Violates one or more constraints.

Feasible Solution: Satisfies all constraints.

Cost and Revenue Analysis

Fixed Cost: Remains constant regardless of production volume.

Variable Cost: Changes with production volume.

Marginal Cost: Rate of change of total cost with respect to volume.

Marginal Revenue: Rate of change of total revenue with respect to volume.

Breakeven Point: Volume where total revenue equals total cost.

Mathematical and Forecasting Techniques

Linear Programming: Maximizing or minimizing a linear objective function, subject to constraints.

Forecasting: Methods used to predict future aspects of business operations.