Basic Concepts and Precepts

goals. These resources (raw materials

and factor services) known as inputs are fed in at one end,
and the finished goods or services
known as outputs, emerge at the other end. These inputs may be
regarded as being combined to produce
the output or being used up (or sacrificed) in order to
gain the output.
The product ofone industry maybe
used in another industry. For example, coal is the product of
a colliery, but, when it is
used in a factory, it becomes a factor of production, Similarly, wheat is
output for a farmer, but, when it
is used to produce bread, it becomes a factor of production. Thus,
a firm buys the inputs for use
in its production, whereas it produces or processes the output for
sale.
Each distinct input into the production
process can be regarded as a factor of production, All these
factors of production help in the process of
production. For example, for the production of garments,
piece of land is required to build a factory,
where the production takes place. This also requires the
services of labour. Capital is required to meet capital expenditure on
the purchase of machines,
tools, etc., and for incurring recurring operating expenditure on
raw materials, fuel, power etc.
Finally, the services of enterpreneur are required to organise, supervise and coordinate the whole
process of production including the services of land, labour and capital. These are (four) primary
inputs in the sense that they participate in the production activity in the first instance.
A distinction is required to be made between the factors of production and the services which they
render in production. When a producer hires a factor of production, it is not the factor but his
servicesthat are bought.
The traditional four-fold classification of factors of production, viz„ land, labour, capital ond
entrepreneur is modified by several economists, To some, organisation is not a separate factors of
production, viz., capital and labour. Here, capital includes land and labour includes entrepreneur
also. At the extreme. Karl Marx emphasised only one factor of production, i.e., labour. In his view,
land cannot produce anything by itself, unless it is used by man. Further, capital is man-tuade and
is the embodiment of labour. Finally, entrepreneur is not a separate factor of production, rather it
is a form of labour. Therefore, all factors of production are reducible to labour. However, it will be
convenient to classify all factors of production under the four heads. It will also be useful to study
the distribution of incomes as rent for land, wages of labour, interest on capital and profit to
entrepreneur. These four factors of production are briefly discussed here.

2.3 MARGINALISM
As resources are scarce, each and every additional unit of resources is to be utilized by the managers
with utmost care. A decision about additional investment is taken on the basis of the additional
return from that investment. An investment is worthwhile, if it causes total revenue (ret urn) to rise
more than the total cost or if it causes total revenue (return) to decline less than the total cost.
Similarly, in a decision to employ an additional worker or Inachine, one need to know the additional
output expected therefrom. Resources should be allocated or hired in such a way that the ratio of
marginal returns and marginal costs of various uses of a given resource or of various resources in a
given use is the same. In other words, the value added by the last unit of the resource is the same in
all cases. This concept (known as equi-marginal principle) is used in capital budgeting, where the
limited resources of the firm have to be allocated in a rational manner. If the said equity were not
established, the decision maker would add to his utility/profit by reshuffling his resources/inputs.
 Economics I

2.6 of return of output.

magnitudes
term 'marginal' for such additional marginal product of machine,
In Economics,we use the oflabour,
investment, marginal product marginal revenue from
output sold)
Termslike marginal return on ofproduction,
marginalsalesof advertisement,
marginal cost corresponding concept dealing with
examples.The
marginalutility of consumption are some called as equi-marginalism. Equi marginal
factor is
equilibriaof more than one commodity or —
(MU = MU2
principal for a multi commodity consumer — = MCN)2, multi market
plant monopolist (MCI = MC2
= MPN),multi = MTN) can be
product firm (Miti = Mlt2 =
—MRN)3and multi
chapters for uniform as well as unequal price of
easily explained after reading relevant subsequent
the input/ commodity.
variable (cost, revenue or profits)
The marginal concept measures the change in the dependent
many times, the independent
with respect to a unit change in the independent variable. However,
because of a change
variable may be subject to 'chunk changes'.For example, the output may change
In such
in process, pattern or a combination of factors, which may not be measured in unit terms.
situation, the concept of 'marginalism' has to be replaced by 'incrementalism'. Incremental concept
involvesthe estimation of the impact of a decision. Two fundamental concepts in this connection
are incremental revenue and incremental cost. The additional revenue earned by a business firm
through computerizationmay be termed as 'incremental revenue',while the additional cost of
installing computer facilitiesmaybe termed as 'incremental cost'.In fact, all marginal concepts are
incremental concepts, but not vice-versa.The implication of these concepts is that incremental
benefits must be higher than incremental costs for profitable decision. In the words of Dominick
Salvatore4,"The firm should change the price of a product or its output, introduce
a new product,
or a new version of a given product, accept a new order, etc., if the increase
in revenue from the
action exceeds the increase in total or incremental cost."
Table 2. I shows the difference between the marginal and incremental
concepts.
Table 2.1 : Marginal and Incremental
Concepts
Marginal Concept IncrementalConcept
1. It is expressed in terms of a unit change. l. It is expressed
in terms of
2. Here, the reference is to one independent 2. bulk change.
Here, more than
one independentvaflable
3. It is more specific. • 3. It is more
general.
4. All marginal concepts are incremental 4.
not marginal
2.4 TIMEVALUEOF MONEY
Decision making involves coordination between past, present and
a decision, he has to analyse the present problem with referencefuture. Wh
to past enever manager
observations, contemplating its future implications. He must co data
nsider the of facts, figures and
2. See Chapter 14, Section 14.4 for details short and
14.6.2for details
long-run
3. See Chapter 14, Sub-section
4. Dominick Salvatore:Managerial Economicsin a GlobalisedEcononth Editio