Financial Decision-Making

Introduction

The process of engaging in effective financial decision-making requires the cultivation of a range of adjacent skills. It is crucial that the individual that aspires to be a competent decision making regarding financial questions strives to develop the skills that will be necessary to manage the relevant financial affairs in an optimal capacity. To the degree that an individual feels they are experiencing a skill gap, it is crucial that action is taken to further acquire the experience that is necessary for one to be a financial decision making that is capable of formulating optimal financial plans. A range of parallel concerns can also be identified such as the need to develop a comprehensive understanding of essential economic principles such as the analysis of supply and demand, and the analysis of such economic factors as cost, production, elasticity, and pricing (Blanchard, 2011). It is necessary to apply these analytical processes to the market for particular commodities and to be able to analyze price fluctuations.

Step 1: Overcoming Skill Gaps

One of the first steps that are involved in the process of becoming an effective financial decision-maker is to take inventory of one’s personal skills in a variety of areas related to financial competency, and related decision-making processes. Becoming an effective decision-maker requires that an individual cultivates the ability to utilized analytical procedures in a way that relates facts and data to one another in a way that formulates a comprehensive whole. The skill gap analysis process that has been completed informs the individual of the ways in which their skills are potentially deficient and the parallel ways in which these factors impact one’s ability to engage in effective financial decision-making (Varian, 2010). Many important skills are required in order to cultivate the means of becoming an efficient financial analyst, and a competent professional in the discipline of financial analysis must necessarily seek to acquire these skills.

A financial decision-maker must also be an excellent communicator and capable of engaging in the exchange of information with others in a productive manner. It is also necessary to possess the capability of engaging in critical thinking and critical analysis as part of the process of making solid financial decisions. A keen financial analyst certainly requires the ability to utilize and effectively apply the principles of quantitative reasoning. The processes of engaging in leadership, facilitating teamwork and cooperative action, and collaborating with others are also critical (Eaton, Eaton, & Allen, 2002). Finally, an effective financial decision-maker must possess the skills that are necessary to develop financial strategies that will achieve the results that are compatible with financial success. Strategic thinking is a fundamental part of engaging in financial planning and development. A strategic thinker must also be future-oriented.

Step 2: Analyzing Supply and Demand

The development of effective analysis of the process of supply and demand necessarily involves the cultivation of a comprehensive understanding of a range of essential factors. Multiple forces impact the level of supply and demand that exists for a particular commodity at any one time. Some commodities are prone to experience a very high level of fluctuation when it comes to the overall demand that exists for the commodity in question. However, other commodities will maintain a fairly stable level of demand. A similar analysis can be applied to the supply of a particular product or service. At times, there will be shortages of certain goods and services, while at other times there may be a glut on the market in a way that is representative of a process of overproduction and/or under consumption (Dwivedi, 2001). Other products and services maintain a relatively consistent level of supply. Of course, the level of supply and demand greatly impacts price fluctuations and the stability of prices.

Oil is an important example of how the concepts of supply and demand impact particular commodities. Oil is a product for which there is a near-universal demand given the dependence of modern industrial economies on fossil fuels. The demand for oil remains rather constant. The two main factors that have the effect of increasing the level of consumer demand for oil are population growth and economic demand as each of these has the effect of requiring a great amount of petroleum to sustain the actions of increasing numbers of people in growing economies. However, the supply of oil sometimes fluctuates. The most extreme examples involve situations where the supply of oil is deliberately constriction through embargos and sanctions (Varian, 2010). The oil supply can also be reduced through economic failure, civil unrest, war, natural disasters and another phenomenon that interrupts the process of extracting, refining, and shipping petroleum-related products.

Step 3: Analyzing Cost, Pricing, Elasticity, and Production

The ability to engage in effective financial decision-making processes is also dependent on the ability of the analyst to understand critical macroeconomic and microeconomic factors. When examining the financial issues that are related to the trade in a particular product, the most fundamental concern involves considerations of cost perspectives and the ways in which various factors impact the costs of the product in question. For example, costs are directly related to pricing mechanisms. However, pricing is heavily dependent on the degree to which there is an elasticity of demand or supply for the product or service that is being examined (Dwivedi, 2001). The factors that are associated with production are also critical to the cultivation of an analytical methodology of this kind, and in a way that provides for the development of a full understanding of market processes. Costs involve the interactive relationship between pricing, elasticity, and production.

The pricing system that is utilized to signal the volume of consumer demand for a product will also be dependent on a wide range of variables. Pricing is impacted by market forces that determine patterns of consumer behavior. For example, the level of demand for petroleum increases during certain cycles because of a wide of factors that impact fuel costs. During the winter season, there is a greater demand for fuel with which to heat homes and businesses. However, during other times of the year, more fuel may be devoted to travel costs. Many different kinds of fluctuations occur in the market because of such variables even if the market for a particular product remains highly stable on a macroeconomic level (Eaton et al., 2002). A wide range of microeconomic factors are associated with elasticity. However, an excess of elasticity can have a destabilizing impact on production due to a reduced ability to engage in forecasting.

Step 4: World Oil Price Movements

An illustration of the above concepts can be observed through an examination of world oil price movements. The fluctuation of the costs of petroleum on the world market is typically impacted by many different associated variables, and in ways that exercise a critical impact on the consumer costs that are associated with fuel as a commodity. The factors related to supply and demand help to shape the international oil industry through the interactive relationship between the various components of production and distribution. The micro-level interactive processes that take place with localized markets are an example of the factors that are present in ways that ultimately influence world oil prices (Mankiw, 2014). A key local market for a primary oil producer may experience a temporary disruption due to some set of unforeseen or unfortunate circumstances. It is possible for localized disruptions of these kinds to take place in ways exercise a so-called “ripple market” on the wider market.

The world oil market is impacted by the production rates that are maintained by oil-producing nations as well as the levels of consumption that are maintained by nations for whom oil is either an export product or an imported product, or both. A rise in production in certain oil-producing regions can have the effect of generating a glut on the market in a way that results in an excess supply causing prices to fall. However, the disruption of oil production or the intentional slowing of oil production by leading producer nations and business sectors that are involved in the petroleum industry can also have the impact of reducing the supply and causing a sharp rise in prices (Tullock, 2005). The shifting costs that are associated with prices, elasticity, production and general levels of supply and demand have the effect of creating equilibrium among market forces over time, and in ways that generate long-range consistency.

Step 5: Executive Summary

Financial decision-making involves the consideration of a wide range of factors that are connected to the shaping of market outcomes in ways that impact the levels of supply and demand for particular commodities, along with the development of fluctuating prices related to various forms of elasticity which either impedes or expands overall patterns of consumption. It is crucial that effective financial decision-makers approach the process of financial analysis through the use of the skills that are essential for success in such endeavors. The financial planner must begin by identifying their own skill gaps and take corrective action for the purpose of overcoming these deficiencies (Morrell, 2009). Those who aspire to be successful financial decision-makers should seek to cultivate their skills in the areas of communication, critical thinking and critical analysis, and quantitative reasoning. The development of skills in the areas of leadership, facilitation, and collaboration are also essential, along with the process of engaging in the formulation of effective financial strategies.

Financial analysis involves many different component parts that are heavily interrelated with each other and must be taken into consideration when a successful financial strategy is being devised. Certainly, it is crucial to consider the range of factors that are involved in the development of market forces that determine the outcome of financial decision-making processes. The first consideration involves the basic factors that are associated with supply and demand in ways that determine the primary pricing mechanisms that are associated with particular commodities. The principles of supply and demand will impact costs in ways that are related to pricing systems that are in turn based on the degree of elasticity of demand that exists within a particular market in relation to the various factors in production (Eaton et al., 2002). The example of world oil price movements is indicative of the market processes on which financial decision-making is dependent.

Conclusion

Engaging in effective financial decision-making requires a full body of skills that can only be acquired through ongoing diligence. It is essential that an effective financial decision-maker begins with an effort to cultivate the essential personal skills that are required for success in the field of financial planning. The financial decision-maker must have not only the relevant skills regarding critical thinking, analytical methods, communication, and engagement with others in collaborative efforts, but also the ability to understand crucial considerations related to the analysis of supply and demand, the development of cost analysis, pricing mechanisms, elasticity-related concerns, and factors of production (Mankiw, 2014). The price movements of commodities on the world market are also a critical area of concern.

References

Blanchard, O. (2011). Macroeconomics updated (5th ed.). Englewood Cliffs, NJ: Prentice Hall.

Dwivedi, D.N. (2001). Macroeconomics: Theory and policy. New Delhi: Tata McGraw-Hill.

Eaton, B. C., Eaton, D. F. & Allen, D. W. (2002). Microeconomics (5th ed.). Englewood Cliffs, NJ: Prentice Hall.

Mankiw, N. G. (2014). Principles of economics. Cengage Learning.

Morrell, K. (2009). Governance and the public good. Public Administration, 87(3), 538–556.

Tullock, G. (2005). Public goods, redistribution, and rent-seeking. London: Edward Elgar Publishing, Inc.

Varian, H.R. (2010). Intermediate microeconomics: A modern approach. New York, NY: W.W. Norton & Co.