Fundamental Principles/Concepts of Managerial Economics

PRESENTED BYABHISHEK SINGH AKRITI SRIVASTAVA AMIT KUMAR

1.Introduction

Index

2. Opportunity cost principle 3. Marginal principle

4. Incremental principle
5. Discounting principle 6.References

Economic theory offers a variety of concepts and analytical tools of considerable assistance but the most significant contribution of economics to managerial economics lies in certain principles which are to entire gamut of managerial economics. Economic principles assist in rational reasoning and defined thinking. They develop logical ability and strength of a manager. Some important principles of managerial economics are discussed here.

1.Introduction

2. Opportunity cost principle

What is it? The concept is related to the alternative uses of scarce

resources.

The second best alternative available is called

opportunity cost.

No second choice means no opportunity cost. It is also defined as the cost of sacrificed alternative. Not only applicable to finance.

 Example- Suppose a firm has Rs.100 ml at its disposal. It

has three alternative investment options. Annual returns from them are as follows. (a) Rs.20 ml, through expansion. (b) RS. 18 ml, through setting new unit. (c) Rs.16 ml, through buying shares in another firm.

Economic gain or profit

Difference between the alternative chosen and

opportunity cost is called economic gain or profit.

In the last example

Economic gain = Rs.2 ml.

3. Marginal principle
What is it?
Meaning of term marginal refers to change in total

quantity or value due to one unit change in its determinant.

It assumes special significant where maximization or

minimization is involved.

 Marginal cost(MC). MC=TCnTCn-1 Marginal revenue(MR). MR= TRnTRn-1 If TC & TR are in the form of function then MC & MR are defined as the first derivative of TC & TR functions respectively.

Decision rule

Business is done only if

MR > MC.
But for profit maximization, new condition is that

MR = MC.

Limitation
It has two serious problems
It can be applied only where management has TC &

TR data for each and every unit of output.

This concept of marginality when used inn cost

analysis, reduces the value of MC to the change in variable cost only.

4.Incremental principle

It involves estimating the impact of a decision on

alternatives, on cost and revenue stressing the change in total cost and revenue.
There are two fundamental concepts.

Concept of cost. 2. Concept of revenue.

1.

According to W.W.Haynes s A decision is profitable if

It increases revenue more than cost. 2. It increases some revenue more than it decreases others. 3. It decreases some cost more than it increases others. 4. It reduces cost more than revenue.
1.

Incremental reason

Use of incremental principle. Used in accepting or rejecting the

proposition or option.

Contribution analysis

Definition. Relevant Incremental costs for

contribution analysis. 1. Present explicit cost (a) Explicit variable cost. (b) Fixed cost. 1. Opportunity cost. 2. Future incremental cost.

 Considers the change in the value

Concept of Discounting

of currency. Based on the proverb, a bird in hand is better than two in the bush. According to this principle money received today should be invested to earn additional money immediately.

References
Arun Kumar and Rachna Sharma, Managerial

Economics. Joel Dean, Managerial Economics. D.N. Diwedi, Managerial Economics. www.managementstudyguide.com.