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:. Marginal analysis implies judging the impact of a unit change in one variable on the other. Marginal generally refers to small changes. Marginal revenue is change in total revenue per unit change in output sold.
Marginal cost refers to change in total costs per unit change in output produced While incremental cost refers to change in total costs due to change in total output. If the marginal revenue is greater than the marginal cost, then the firm should bring about the change in price. 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.
Subscribe via Email
Incremental analysis is generalization of marginal concept. It refers to changes in cost and revenue due to a policy change.
For example - adding a new business, buying new inputs, processing products, etc. Change in output due to change in process, product or investment is considered as incremental change.
Incremental principle states that a decision is profitable if revenue increases more than costs; if costs reduce more than revenues; if increase in some revenues is more than decrease in others; and if decrease in some costs is greater than increase in others. 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. According to the modern economists, this law has been formulated in form of law of proportional marginal utility.
It states that the consumer will spend his money-income on different goods in such a way that the marginal utility of each good is proportional to its price, i.
Similarly, a producer who wants to maximize profit or reach equilibrium will use the technique of production which satisfies the following condition:.
By opportunity cost of a decision is meant the sacrifice of alternatives required by that decision.
If there are no sacrifices, there is no cost. It is also defined as the cost of sacrificed alternatives.
For instance, a person chooses to forgo his present lucrative job which offers him Rs. The opportunity lost earning Rs.
Equi-Marginal Principle in Managerial Economics
Short-run refers to a time period in which some factors are fixed while others are variable. The production can be increased by increasing the quantity of variable factors.
While long-run is a time period in which all factors of production can become variable. Entry and exit of seller firms can take place easily.
From consumers point of view, short-run refers to a period in which they respond to the changes in price, given the taste and preferences of the consumers, while long-run is a time period in which the consumers have enough time to respond to price changes by varying their tastes and preferences. 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.
"Marginal" Explained in 90 Seconds - Economics
This is essential because a rupee worth of money at a future date is not worth a rupee today. Money actually has time value. Discounting can be defined as a process used to transform future dollars into an equivalent number of present dollars. Where, FV is the future value time at some future time , PV is the present value value at t0, r is the discount interest rate, and t is the time between the future value and present value.
Principles of Managerial Economics
View All Articles. Similar Articles Under - Managerial Economics. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link s to ManagementStudyGuide. Is Deflation Really Bad for the Economy?