MANAGERIAL ECONOMICS

ASSIGNMENT
SUBMITTED TO: Dr. Tanmay Pant
SUBMITTED BY: Asma Hussain
MBA 1ST YEAR
BATCH :- (2023-25)

Principles of Managerial Economics

Marginal Utility
Marginal Utility refers to the additional satisfaction or benefit that the consumer gets from
consuming one more unit of a good for service. It helps us understand how the value or
usefulness of each additional unit changes as we consume more. In managerial economics,
this concept helps businesses understand how consumers preferences change as they
consume more of a product. It helps them to determine the optimal production levels and
pricing strategies to maximize customer satisfaction and profits.
The law of diminishing Marginal Utility in managerial economics states that as you consume
more of a good or service, the additional satisfaction or utility you get from each additional
unit tends to decrease. It means that the more you have of something, the less each additional
unit adds to your overall satisfaction. It helps managers make decision about pricing and
production.
Example:
let’s assume a company produces and sells smartphones. Initially, when they release a new
model, customers are really excited and willing to pay a high price for it. The first few units
sold have a high marginal utility because customers value the new features and
improvements.
However, as more units are produced and sold, customers may start to view the additional
units as less valuable. The marginal utility decreases because they already have the latest
model or they may have alternative options in the market. So, the company needs to consider
this when deciding how many units to produce and at what price.
This example illustrates both marginal utility and the law of diminishing marginal utility. The
initial units have high marginal utility, but as more units are consumed, the additional
satisfaction or utility diminishes.

EQUI MARGINAL UTILITY

Equi marginal Utility refers to the principle that states individual allocate their resources in a
way that maximizes their total utility or satisfaction. It suggests that individuals should allocate
their resources in such a way that the marginal utility derived from the last unit of each
resource is equal. By doing so, they can achieve the highest level of overall satisfaction. This
concept is important for managers when making decisions about resource allocation and
optimizing the use of resources to maximize utility.
Example:
Let’s say you have a limited budget to spend on two goods; pizza and ice cream. The price of
a slice of Pizza is ₹2, and the price of an ice cream cone is ₹3. You have ₹10 to spend.
Now let’s assume that the marginal utility you derive from the last slice of pizza is 8 units, and
the marginal utility you derive from the last ice cream cone is 10 units. To maximize your utility,
you would allocate your resources in a way that the marginal utility per rupee spent in equal
for both goods. In this case, you would continue purchasing pizza and ice cream until the
marginal utility per rupee spent is equal for both.
So, if the marginal utility per rupee spent on pizza is higher than that of ice cream, you would
buy more pizza until the marginal utility per rupee spent on pizza decreases and becomes
equal to that of ice cream.
By allocating your resources in this way, you are maximizing your total utility and getting the
most satisfaction out of your limited budget.

OPPORTUNITY COST
Opportunity cost refers to the value of the next best alternative that we give up when making
a decision. It’s all about weighing the benefits and drawbacks of different choices. It’s like the
cost of what the manager could have chosen instead.
When the manager has limited time or resources, every decision he or she make comes with
an opportunity cost. It helps the manager to consider the potential benefits he or she are
sacrificing by choosing one option over another. So, it’s important to weigh the trade-offs and
make the best decision for your business.
Example:
Let’s say a company has limited funds and deciding between two investment projects. Project
A has the potential for high returns, but it requires significant upfront investment. Project B
has lower returns, but it requires a smaller upfront investment. If the company choose Project
A, the opportunity cost would be the potential profit they could have earned from Project B.
By choosing Project A, they are giving up the benefits that could have been gained from
project B. So, the opportunity cost in this case is the value of the next best alternative, which
is the potential profit from Project B.

INCREMENTAL COST
The incremental concept in managerial economics refers to the idea of analyzing the changes
in costs and benefits when making decisions. It involves comparing the additional or
incremental costs and benefits of a particular decision or action.
The incremental concept allows business to evaluate the potential impact of their decisions
on various aspects, such as revenue, costs, market position, and customer satisfaction. It helps
them consider the trade-offs and make choices that maximize their overall performance.
Example:
Let’s say a company is considering whether to introduce a new product line. They would
evaluate the incremental costs, such as the cost of production, marketing, and distribution, as
well as the incremental benefits, such as the potential increase in revenue and market share.
By comparing these incremental costs and benefits, the company can make an informed
decision about whether the new product line is financially viable.
The incremental concept helps business assess the impact of their decisions on costs and
benefits, allowing them to make efficient and effective choices in managerial economics.

TIME PERSPECTIVE PRINCIPLE

The concept of time perspective refers to how managers consider the timing of their decisions
and the impact of time on various aspects of their business. It involves analyzing and
understanding the effects of time on costs, revenues, investments, and other factors that
influence decision-making.
Managers need to consider the time value of money, which means that a rupee received today
worth more than a rupee received in the future due to factors like inflation and opportunity
cost. By taking time perspective into account, managers can make more informed decisions
that align with their business goals. It’s all about considering the timing and the long-term
implications of their choices.
Example:
Let’s say a manager is considering whether to invest in new technology for their
manufacturing process. With a short-term time, perspective, the manager might focus on the
immediate costs of implementing the technology. However, with a long-term time
perspective, the manager would consider the potential long-term benefits, such as increased
efficiency and cost savings over time. By taking a time perspective into account, the manager
can make a more informed decision that consider both short-term and long-term implications.
It’s all about balancing immediate costs with long-term benefits.

DISCOUNTING PRINCIPLE
Discounting principle refers to the concept of assigning lower value to future costs and
benefits compared to present costs and benefits. It recognizes that the value of money
decreases over time due to factors like inflation and the opportunity cost of using that money
elsewhere. By discounting future costs and benefits, mangers can determine the present value
of an investment or decision and evaluate its profitability. It helps in making informed
decisions by considering the time value of money.
Example:
Let’s say a manager evaluating two investment projects. Project A has cost of 10,000 and is
expected to generate a cash flow of 15,000 in one year. Project B has a cost of 15,000 and is
expected to generate a cash flow of 20,000 in two years.
To determine which project is more profitable, you would apply the discounting principle. By
discounting the future cash flows to their present value, you can compare the profitability of
the projects.
Let’s assume a discount rate of 10%. Using the formula of discounting principle, we could
calculate the present value of each project’s cash flows;
For Project A:
Present value = 15,000 / (1+0.1) ^1 = 13,636.36
For Project B:
Present Value = 20,000 / (1 + 0.1) ^2 = 16,528.93
Based on the present value of the cash flows, you can see that Project B has a higher present
value, indicating that it is more profitable, even though it has a higher initial cost. This is
because the cash flow from Project B is received later, and the discounting principle accounts
for the time value of money.