FIVE FUNDAMENTAL CONCEPTS

OF MANAGERIAL
ECONOMICS

Presented by:- Bhoopendra

Chauhan
MBA(int.) 5th Sem
MANAGERIAL
ECONOMICS

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MANAGERIAL +
ECONOMICS
Managerial economics is a branch
of economics involving the
application of economic methods in
the managerial decision-making
process. ... Managerial
economics focuses on increasing the
efficiency of organizations by
employing all possible business
resources to increase output while
decreasing unproductive activities

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FUNDAMENTAL CONCEPTS

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FUNDAMENTAL CONCEPTS

• INCREMENTAL REASONING
• OPPORTUNITY COST
• TIME PERSPECTIVE
• TIME VALUE OF MONEY – DISCOUNTING PRINCIPLE &
• EQUI-MARGINAL PRINCIPLE

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1.INCREMENTAL REASONING
The two basic concepts in the incremental analysis
are : incremental cost and incremental revenue.
• Incremental cost may be defined as the change
in total cost as a result of change in the level of
output, investment, etc
•Incremental Revenue is change in total revenue
resulting from change in level of output , price etc.
Use of Incremental Reasoning
While taking a decision, a manager always
determines the worthwhile ness of a decision on
the basis of criterion that the incremental revenue
should exceed incremental cost. 6
A COURSE OF ACTION SHOULD BE PURSUED UP TO THE
POINT WHERE ITS INCREMENTAL BENEFITS EQUAL ITS
INCREMENTAL COSTS.

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 2.OPPORTUNITY COST
• Opportunity cost, therefore, represents the
benefits of revenue forgone by pursuing one
course of action rather than another.
For e.g:
(a) The opportunity cost of the funds employed
in one’s own business is the amount of interest
which could have been earned had these funds
been invested in the next best channel of
investment
(b) The opportunity cost of using an idle
machine is zero, as its use needs no sacrifice of
opportunities. 8
 OPPORTUNITY COST
•Opportunity cost includes both the explicit and
implicit costs:-

Explicit costs are recognized in the accounts , e.g.,

the payments for labour, raw materials, etc

Implicit (or imputed) costs are sacrifices that are

not recorded in accounting e.g. cost of capital
supplied by owners of business.
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 4.TIME PERSPECTIVE

Economists often make a distinction between short

run and long run.
•Short run means that period within which some of
the inputs (called fixed inputs) cannot be altered.
•Long run means that all the inputs can be
changed.
Economists try to study the effect of policy
decisions on variables like prices, costs, revenue,
etc, in the light of these time distinctions.

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 5.DISCOUNTING PRINCIPLE
•The concept of discounting future is based on the
fundamental fact that a rupee now is worth more than a rupee
earned a year after.
•Unless these returns are discounted to find their present
worth, it is not possible to judge whether or not it is worth
undertaking the investment today.

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 6.THE EQUI-MARGINAL
PRINCIPLE
•The law of equi-marginal utility states that a utility
maximizing consumer distributes his consumption
expenditure between various goods and services he/she
consumes in such a way that the marginal utility derived
from each unit of expenditure on various goods and service is
the same.
•This principle suggests that available resources (inputs)
should be so allocated between the alternative options that
the marginal productivity (MP) from the various activities are
equalized.

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 THE EQUI-MARGINAL
PRINCIPLE

The
equi
marginal
principle
suggests
that
aprofit
(gain)
maximizing
firms
allocates
its
resources
inaproportion
such that
MPA MPB MPC ...
MP N

The
equi
-marginal
principle
canbeapplied
only where
(i)firms
have
limited
investible
resources
(ii)
resources
have
alternativ
euses
and
(iii)
the
investment
in various
alternativ
euses
issubject
diminishin
to g
marginal
productivi
tyorreturn.
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THANK
YOU