ECONOMIC

PRINCIPLES
By
Mrs. N. Jayaprada
Relevant to Managerial
Decisions
Concept of scarcity
Concept of Opportunity Cost
Incremental concept
Marginalism
Equi marginalism
Time perspective
Discounting Principle
Risk and Uncertainty
Profits

Concept of scarcity

Human wants are unlimited, but human capacity
to satisfy such wants is limited.
Business firms resources available are limited,
and the managers need to optimally utilise them.



Consumers Maximum satisfaction
Firms Maximum output
Resource
s
available
Demand for resources
Concept of Opportunity
Cost/Alternative Cost



Benefit forgone from the next best alternative
that is not selected.
Cost of sacrificing one alternative.
Quality Vs Quantity
Premium(classes) Vs Popular
products(masses)
Skimming price Vs Penetration Price
ex: Reliance and Tata Indicom

Scarce resources Unlimited wants
Ration
al
choice
s
Production Possibility
Curve/Frontier
(PPC/PPF)
For society/Economy
A graph that shows the different combinations
of the quantities of two goods that can be
produced(or consumed) in an economy,
subject to limited availability of resources.
For individual
The different combinations of two commodities
that the individual can have, with a given
income or budget, and at a given prices of the
commodities being purchased.
Equi-marginal principle
Consumer behaviour
The Law of Equi-Marginal Utility is an extension to
the law of diminishing marginal utility.
It states that
A consumer distributes his consumption
expenditure between various goods and services
he/she consumes in such a way that the marginal
utility derived from each unit of expenditure on
various goods and services is the same.
The pattern of consumers expenditure maximizes a
consumers total utility.

For Firm
The law of equi-marginal principle has been
applied to the allocation of resources
between their alternative uses with a view to
maximizing profit in case a firm carries out
more than one business activity.
This principle suggests that available
resources(inputs) should be so allocated
between the alternative options that the
marginal productivity gain (MP) from the
various activities are equalized

Incremental concept &Marginalism

Incremental concept
Increase in total cost or revenue as a bulk
incremental cost and revenue of online
selling
Maginality
A unit change in cost or revenue or utility
Increase in total cost or revenue due to
change in output - as a unit
MC=Change in total Cost/change in Total
Output


Discounting Principle

Time value of money
Value of money depreciates with time.
Business decisions relate to outflow and inflow
of money and resources that take place at
different points of time.
Discounts future inflows to their present value
level.
PVF=1/(1+r)
n
Where PVF=Present Value
Factor
n=Period
r= Rate of interest

Time Perspective
Long run and short run
Short run period within which some of the
inputs cannt be altered - fixed inputs
Long run period within which inputs can be
changed no fixed inputs
Right Balance between short and long run
Ex: Profit maximisation - shortrun
Profitability maximisation - longrun

Risk and Uncertainty

Risk
Possibility of getting loss
Common to every business
Can be planned and managed
Business risk, market risk, political risk,
systematic risk, unsystematic risk
Uncertainty
Situation of unpredictable
Cant be planned and managed.


Profits

It is the return to the entrepreneur for the use of his
entrepreneurial ability Economists
An economic profit arises when revenue exceeds the
opportunity cost of inputs. Profit =Income-Expenses
Kinds of profit Earnings of management
Windfall profits
Monopoly profits
Functional Reward
Concepts of profits - Gross profits, Net profits,
Operating profits
Normal and Abnormal profits
Abnormal profits = Actual profits Normal Profits

Profits
Necessary for survival of firm in the long run.
Indicator of financial health and growth.
Index of performance of the firm.
Premium to cover costs of staying in business
and
It ensures supply of re-investible capital.
Queries ?????
Thank you