Important Concepts of business economics

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1. Various objectives of the firm: Profit maximization Sales maximization Long run existence Entry prevention Achieving targeted profits Maximization of manager’s utility function HOWEVER PROFIT MAXIMIZATION IS REGARDED AS THE MOST COMMON AND THEORITICALLY MOST VIABLE OBJECTIVE OF A FIRM.

2. What is Profit? Accounting Profit Vs. Economic/Pure Profit Accounting Profit = Total Revenue – ( wages + rent + interest + cost of materials + overhead costs) Economic Profit = Total Revenue – (Explicit costs + Implicit costs)

3. Opportunity cost is also an Implicit cost. Opportunity cost is the income from the next best opportunity that is forgone by the factors of production to stay in their current use. Examples:- forgone salary of the businessman - forgone rent on businessman’s land -forgone income from the project that was not undertaken.

4. Applying Opportunity cost in Decision Rule: Opportunity Cost helps us understand the true cost of a decision . Compare options :  The primary decision rule related to opportunity cost is to compare the net benefits of each available option.  Select the best alternative :  You should choose the option where the benefits are greatest, considering what you are giving up .   Significance of the concept of Opportunity Cost : Helps in proper resource allocation It facilitates decision making where there are alternative options involved.

5. MARGINALISM AND DECISION RULE Marginal Value is a widely used concept in microeconomics . Marginal Utility is used in Consumer Behaviour Analysis Marginal Cost is used in Production Analysis Marginal Revenue is used in Pricing.

6. Marginal Utility facilitates optimal decision making of consumers. Giving answer to the question – How much to buy? Marginal Utility is the additional utility that a consumer derives from the consumption of an extra unit of product. Consumer’s decision rule : Marginal Cost and Marginal Revenue facilitate optimal decision making of producer. Giving Answer to the question – How much to produce? Marginal cost is the cost of producing an extra unit of output. Marginal Revenue is defined as the change in Total Revenue by selling an extra unit of output. producer’s DECISION RULE: Marginal Benefit > or = marginal price MARGINAL REVENUE = MARGINAL COST

7. Incrementalism : The most frequently used principle in Business Economics. OBJECTIVE : Maximization of profits. WHEN TO APPLY: Where a new decision involves large increase in total cost and total revenue is involved. Two major concepts in this analysis: Incremental cost: change in the total cost because of a particular decision .(includes variable costs and fixed costs both) Incremental Revenue: change in the total revenue resulting from a particular decision.

8. A decision is profitable when : When Total Revenue > Total Cost When New decision reduces Total Cost When New decision increases Total Revenue

9. Marginalism Vs. Incrementalism Marginal principle is used where high degree of precision is involved whereas Incrementalism is used where large values of costs and revenue is involved. Incrementalism is a more practical and widely used principle in decision making whereas Marginalism is a more theoretical concept . Marginalism is applicable in taking optimal production decisions whereas Incrementalism is applied to all new business decisions .