Classification of Uncertainty in Business: 2 Basis | Managerial Economics

The following points highlight the two basis of classification of uncertainty in business.

The kinds are: 1. Uncertainty According to Areas 2. Uncertainty According to Degrees.

Uncertainty in Business Basis # 1.  Uncertainty According to Areas:

This uncertainty has been divided under eight heads. They are:

1. Demand Uncertainty:

Forecasting of the demand is essential to take decisions regarding production, cost of production, capital requirements etc. Management prepares a demand table and analyses it. All this is done under uncertainty and is simply a guess.

2. Production Uncertainty:

In the study of production uncertainty following points is taken into consideration:

(i) What should be the quantity of Production?

(ii) What should be Production Schedule?

(iii) What resources should be employed in Production Process?

(iv) How should these resources be allocated to Different Production Activities?

These are the questions that create an atmosphere of uncertainty in the process of decision-making.

3. Profit Uncertainty:

Profit is the difference between cost and revenue. Both cost and revenue are uncertain. Therefore, it is hundred percent. Uncertainty that what will be the profit of the firm. A man does business only in anticipation of earnings profit but he cannot be sure of his profit.

4. Price Uncertainty:

Success of a business firm depends to a large extent upon determination of price for a product—but the pricing decision is affected by a large number of external factors over which the management can have no control. Therefore, there is an element of uncertainty in pricing decision.

5. Cost Uncertainty:

Cost of production is also an important factor for determining profit of the firm. Cost estimates are based upon the historical cost data available from the records of a firm. It is to be noted that different elements of cost are always uncertain.

6. Labour Uncertainty:

Labour is the force which converts the decisions and plans of a firm into actions. Regular supply and efficiency of labour determines the success of a firm. But the supply and efficiency of labour are always uncertain. If the management faces a problem in getting required labour force at required time or if the workers do not co-operate in the accomplishment of organisational objectives, the firm cannot be successful.

7. Capital Uncertainty:

There are many uncertainties in the field of capital of a business firm as capital market is affected by many economic and political factors. One cannot be sure what and how much capital one is going to get from the money-market.

8. Environmental Uncertainties:

Environmental factors such as social, economic and political circumstances in which the firm is operating affect the process of decision-making of a firm but it is never certain to predict these factors successfully.

Uncertainty in Business Basis # 2. Uncertainty According to DEGREE:

The divisions of ‘Uncertainty’ according to degree are as follows:

1. Complete Ignorance:

In the complete ignorance a business executive does not know anything about future. He is unable to make any prediction of future events. He may decide a problem in the manner that may not be profitable or that may cause loss also to the firm or his view may be highly profitable to the firm. In this situation, all the decisions depend upon pure guess. There is no scientific basis of such decision.

2. Partial Ignorance:

In this a business executive is neither fully aware nor fully ignorant of a problem. This is a stage between complete knowledge and complete ignorance. In this situation, uncertainty is converted into risk.

3. Complete Knowledge:

In this a business executive has full knowledge of all the facts related with a problem but the profitability of alternative results in fully uncertain. The business executive analyses these facts with the help of statistical methods and techniques. Decisions are taken with the help of analytical study of relevant facts.