18 MAKING ECONOMIC DECISIONS
There are two steps required to solve th~_pr.()ble~:First, the required thickness of each of the
alternate materials must be calculated. Then, since the problem is one of providing a fixed.output
(heat transfer through the wall limited to a fixed maximum amount), the criterion is to minimize
the input (cost).
Required Insulation Thickness
30000 _140(30)
,. L
110(30)
Foamed insulation 30,000=~
L
Cost of Insulation per Square Meter of Wall
Unit cost~ COSt/Ill3x IlJ,sulati()lJ,thickness, in..il1e.t~J:S
Unit cost. $12.50 x 0.14Ill~ $1.75/il12
Unit cost .. $14.00 X 0.11IIi-$154/IIl2
Rock wool L O.14m
L-O.llm
Rock wool
Foamed insulation-~ =-
.........!
The foamed insulation is the lesser cost alternative. However, tl1ete.lsalvilJ,talJ,giblecOn.sttailJ,ttl1at
must be considered. How thick is the available wall space? EngineeplJ,geconomy and.tljet.iil1e
valUeof money are needed to decide what the maX1.mUmheattransfershould be. Whatis the cost
of more insulation versus the cost of cooling the warehouse oVerits life?
Summary
Classifying Problems
Many problems are simple and thus easy to solve. Others are of intermediate difficulty
and need considerable thought and/or calculation to properly evaluate. These intermediate
problems tend to have a substantial economic component, hence are good candidates for
economic analysis. Complex problems, on the other hand, often contain people elements,
along with political and economic components. Economic analysis is still very important,
but the best alternative must be selected considering all criteria-not just economics.
The Decision-Making Process
Rational decision.making uses a logical method of analysis to select the best alternative from
among the feasible alternatives. The following nine steps can be followed sequentially, but
decision makers often repeat some steps, undertake some simultaneously, and skip others
altogether..
- Recognize the problem.
- Define the goal or objective: What is the task?
- Assemble relevant data: What are the facts? Are more data needed, and is it worth
more than the cost to obtain it? - Identify feasible alternatives.