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Fundamental principles of

Managerial Economics
• Opportunity cost
• Marginal principle
• Incremental principle
• Time perspective
• Discounting principle
• Equi-marginal principle

10 April 2018 Gopakumar


Opportunity Cost
• The opportunity cost of any alternative is defined
as the cost of not selecting the "next-best"
alternative.
• The term “marginal” refers to the change
(increase or decrease ) in the total of any
quantity due to a one unit change in its
determinant

10 April 2018 Gopakumar


Marginal analysis

• Marginal benefit = additional benefit


resulting from a one-unit increase in the
level of an activity
• Marginal cost = additional cost
associated with one-unit increase in the
level of an activity
Incremental Principle
• Similar to the marginal value concept
• Marginal Principle is only applicable where
MC and MR are known.
• In general firms do not have the
knowledge of MC and MR

10 April 2018 Gopakumar


Incremental Principle
• Incremental Cost
• Incremental Revenue
• Incremental analysis differs from marginal
analysis only in that it analysis the change
in the firm's performance for a given
managerial decision, whereas marginal
analysis often is generated by a change in
outputs or inputs.

10 April 2018 Gopakumar


Time perspective

• Time is an important factor in business


decision making. A timely decision is
always important and rewarding, if
appropriate.
• Long Run
• Short Run
Time Perspective
• According to this principle, a manger/decision
maker should give due emphasis, both to short-
term and long-term impact of his decisions,
giving apt significance to the different time
periods before reaching any decision.
• Short-run refers to a time period in which some
factors are fixed while others are variable
• long-run is a time period in which all factors of
production can become variable
Discounting Principle

• A present gain is valued more than a future gain.


• According to this principle, if a decision affects
costs and revenues in long-run, all those costs
and revenues must be discounted to present
values before valid comparison of alternatives is
possible.
• This is essential because a rupee worth of
money at a future date is not worth a rupee
today. Money actually has time value
Equi-marginal principle

• Its very significant in determining optimal condition in


resource allocation.
• Marginal Utility is the utility derived from the additional
unit of a commodity consumed. The laws of equi-
marginal utility states that a consumer will reach the
stage of equilibrium when the marginal utilities of various
commodities he consumes are equal.
• A manger can make rational decision by allocating/hiring
resources in a manner which equalizes the ratio of
marginal returns and marginal costs of various use of
resources in a specific use.