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Fundamental Concepts used in Business Decisions

The Opportunity Cost


Suppose a firm has Rs 50 Crores at its disposal and the firm finds three alternative uses of the fund available to it Alternative 1 Expansion Rs 20crore Alternative 2 - Setting up a new production unit - Rs 18 crore Alternative 3 Buying shares in another firm Rs 16 crore

The scarcity and the alternative uses of the resources gives rise to the concept of Opportunity Cost. The limited resources can be put to alternative uses.

If the manager decides to invest in Alternative 1 ????

The difference between actual earning and its opportunity cost is called Economic Gain or Economic Profit. Example: Firing an efficient Labour officer in settlement of dispute with the labour union???

Marginal Principle
Consumer- Marginal Utility Production- Marginal Cost Pricing- Marginal Revenue Related to problem of maximization and minimization Marginal means small changes

It refers to the change in the total quantity or value due to a unit change in its determinant. Example: Suppose TC of producing 100 units of a commodity is Rs 2,500 and TC of 101 units is Rs 2,550 , then MC= Rs 2,550 Rs 2,500= Rs 50.