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MANAGERIAL ECONOMICS 1)The opportunity cost: In microeconomic theory, the opportunity cost of a choice is the value of the best

alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the "cost" incurred by not enjoying the benefit that would be had by taking the second best choice available. It can also be defined as "the loss of potential gain from other alternatives when one alternative is chosen". Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice". The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently. Incremental Principle: The incremental concept is closely related to the marginal costs and marginal revenues of economic theory. Incremental concept involves two important activities which are as follows: Estimating the impact of decision alternatives on costs and revenues. Emphasizing the changes in total cost and total cost and total revenue resulting from changes in prices, products, procedures, investments or whatever may be at stake in the decision. The two basic components of incremental reasoning are as follows: Incremental cost: Incremental cost may be defined as the change in total cost resulting from a particular decision. Incremental revenue: Incremental revenue means the change in total revenue resulting from a particular decision. Principle of Time Perspective: Managerial economists are also concerned with the short run and the long run effects of decisions on revenues as well as costs. The very important problem in decision making is to maintain the right balance between the long run and short run considerations. a decision should take into account both the short run and long run effects on revenues and costs and maintain the right balance between long run and short run perspective. For example: Suppose there is a firm with a temporary idle capacity. An order for 5000 units comes to managements attention. The customer is willing to pay Rs 4/- unit or Rs.20000/- for the whole lot but not more. The short run incremental cost(ignoring the fixed cost) is only Rs.3/-. Therefore the contribution to overhead and profit is Rs.1/- per unit (Rs.5000/- for the lot) Analysis: From the above example the following long run repercussion of the order is to be taken into account: 1) If the management commits itself with too much of business at lower price or with a small contribution it will not have sufficient capacity to take up business with higher contribution. 2) If the other customers come to know about this low price, they may demand a similar low price. Such customers may complain of being treated unfairly and feel discriminated against. In the above example it is therefore important to give due consideration to the time perspectives. Discounting Principle: One of the fundamental ideas in Economics is that a rupee tomorrow is worth less than a rupee today. Suppose a person is offered a choice to make between a gift of Rs.100/- today or Rs.100/- next year. Naturally he will chose Rs.100/- today. This is true for two reasonsi) The future is uncertain and there may be uncertainty in getting Rs. 100/- if the present opportunity is not availed of ii) ii) Even if he is sure to receive the gift in future, todays Rs.100/- can be invested so as to earn interest say as 8% so that one year after Rs.100/- will become 108 Equi - marginal Principle: This principle deals with the allocation of an available resource among the alternative activities. According to this principle, an input should be so allocated that the value added by the last unit is the same in all cases. This

generalization is called the equi-marginal principle. Suppose, a firm has 100 units of labor at its disposal. The firm is engaged in four activities which need labors services, viz, A,B,C and D. it can enhance any one of these activities by adding more labor but only at the cost of other activities. Part B: 1) Managerial Economics: It is a branch in the science of economics. Sometimes it is interchangeably used with business economics. Managerial economic is concerned with decision making at the level of firm. It has been described as an economics applied to decision making. It is viewed as a special branch of economics bridging the gap between pure economic theory and managerial practices. It is defined as application of economic theory and methodology to decision making process by the management of the business firms. In it economic theories and concepts are used to solve practical business problem. It lies on the borderline of economic and management. It helps in decision making under uncertainty and improves effectiveness of the organization. The basic purpose of managerial economic is to show how economic analysis can be used informulating business plans. In the words of Mc Nair and Merriam, Managerial Economics consists of use of economic modes of thought to analyze business situation. According to Spencer and Seigelmanit is defined as the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by the management. Economic provides optimum utilization of scarce resource to achieve the desired result. MEs purpose is to show how economic analysis can be used formulating business planning. 2) Role of managerial economist: