Basic Principles in Economics and Managerial Economics

Info related to Basic principles of Economics and Business economics or managerial economics

1. Basic concepts in Economics & Basic concepts in Managerial Economics Prepared By Mohammed Jasir PV Asst. Professor MIIMS, Puthanangadi Contact: 9605 693 266

2. Basic concepts in Economics SCARCITY CHOICE RESOURCE ALLOCATION TRADE OFF OPPORTUNITY COST

3. SCARCITY Scarcity refers to the basic economic problem Resources are limited and scarce Needs and wants are unlimited This situation requires people to make decisions about how to allocate resources efficiently, in order to satisfy basic needs and as many additional wants as possible.

4. CHOICE Resources are scarce and the available resources have alternative uses Thus the consumer forced to choose the best from available alternative.

5. Due to scarcity of resources , human beings are forced to make a choice. Choice involves a trade-off between costs and benefits. This will lead to giving up something to get something else. Trade-off means giving up one goods or activity to obtain some good or another activity or accepting less of one thing for more of another. Trade –off

6. Thus scarcity leads to choice, Choice leads to trade off, Which in turn leads to opportunity cost.

7. Opportunity cost It is the cost of next best alternative which has been given up. It is the value of alternative foregone in order to have something else The cost of next best alternative forgone

8. It is the earning that would be realized if the available resources were put to some other use. Thus opportunity cost is measures in terms of the sacrifice made behind the decision. Consider that a person has invested a sum of Rs. 50,000 in shares. Let the expected annual return by this alternative be Rs. 7,500. If the same amount is invested in a fixed deposit, a bank will pay a return of 18%. Then, the corresponding total return per year for the investment in the bank is Rs. 9,000. This return is greater than the return from shares. The foregone excess return of Rs. 1,500 by way of not investing in the bank is the opportunity cost of investing in shares.

9. Resource Allocation Analysis of how scarce  resources a re distributed among producers How scarce goods and services are apportioned among consumers This analysis takes into consideration the accounting cost,  economic  cost, opportunity cost, and other costs of  resources  and goods and services

10. Managerial Economics and Decision Making Decision making on internal affairs. Internal affairs talk on internal environment which consists of internal factors such as, Production, Financial, Marketing and Human resource related decisions. Decision making on external affairs. External Affairs talk on external environment which consists of external factors such as, PEST related decisions.

11. Basic Principles of Managerial Economics Opportunity cost principle Incremental principle Marginalism principle Equi-marginalism principle Time perspective principle Discounting principle

12. Incremental principle Incremental cost Incremental Revenue While taking a decision, a manager always determines the decision on the basis of criterion that the incremental revenue should exceed incremental cost.

13. Incremental Principle This principle states that a decision is said to be rational and sound if given the firm’s objective of profit maximization, it leads to increase in profit, which is in either of two scenarios- If total revenue increases more than total cost If total revenue declines less than total cost

14. The two basic concepts in the incremental analysis are : incremental cost and incremental revenue. Use of Incremental Reasoning While taking a decision, a manager always determines the worthiness of a decision on the basis of criterion that the incremental revenue should exceed incremental cost. 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.

15. Marginalism principle Marginal analysis implies judging the impact of a unit change in one variable on the other. Marginal generally refers to small changes. Marginal revenue Marginal cost The decision of a firm to change the price would depend upon the resulting impact/change in marginal revenue and marginal cost. If the marginal revenue is greater than the marginal cost, then the firm should bring about the change in price

16. Equi-marginalism Principle 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.e.,

17. 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.

18. 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 allocated between the alternative options that the marginal productivity (MP) from the various activities are equalized. 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

19. 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.

20. Managerial Economics and Decision Making Decision making on internal affairs. Production Financial Marketing and Human resource Decision making on external affairs. Political Economical Social Technological Legal Environmental

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