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    Equi-Marginal Discounting Principle, Incremental Concept Time Perspective Concept Marginal Principles

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    Prakhar Jain
    This document discusses several key economic concepts for managers: 1) The incremental concept and marginal principles state that decisions should be made based on small incremental changes rather than large overall amounts. 2) The time perspective concept says decisions should balance short-run and long-run effects on revenues and costs. 3) The opportunity cost principle notes any choice has forgoing other options as a cost. 4) Discounting principles acknowledge more risk and uncertainty in the future so future revenues and costs should be adjusted. 5) The equi-marginal concept means inputs should be allocated so the last unit added provides equal value across alternatives.

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    Equi-Marginal Discounting Principle, Incremental Concept Time Perspective Concept Marginal Principles

    Uploaded by

    Prakhar Jain
    331 views11 pages
    This document discusses several key economic concepts for managers: 1) The incremental concept and marginal principles state that decisions should be made based on small incremental changes rather than large overall amounts. 2) The time perspective concept says decisions should balance short-run and long-run effects on revenues and costs. 3) The opportunity cost principle notes any choice has forgoing other options as a cost. 4) Discounting principles acknowledge more risk and uncertainty in the future so future revenues and costs should be adjusted. 5) The equi-marginal concept means inputs should be allocated so the last unit added provides equal value across alternatives.

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    This document discusses several key economic concepts for managers: 1) The incremental concept and marginal principles state that decisions should be made based on small incremental changes rather than large overall amounts. 2) The time perspective concept says decisions should balance short-run and long-run effects on revenues and costs. 3) The opportunity cost principle notes any choice has forgoing other options as a cost. 4) Discounting principles acknowledge more risk and uncertainty in the future so future revenues and costs should be adjusted. 5) The equi-marginal concept means inputs should be allocated so the last unit added provides equal value across alternatives.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    331 views11 pages

    Equi-Marginal Discounting Principle, Incremental Concept Time Perspective Concept Marginal Principles

    Uploaded by

    Prakhar Jain
    This document discusses several key economic concepts for managers: 1) The incremental concept and marginal principles state that decisions should be made based on small incremental changes rather than large overall amounts. 2) The time perspective concept says decisions should balance short-run and long-run effects on revenues and costs. 3) The opportunity cost principle notes any choice has forgoing other options as a cost. 4) Discounting principles acknowledge more risk and uncertainty in the future so future revenues and costs should be adjusted. 5) The equi-marginal concept means inputs should be allocated so the last unit added provides equal value across alternatives.

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    © All Rights Reserved
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    of 11

    FUNDAMENTAL CONCEPTS OF MANAGERIAL

    ECONOMIC’S

    Equi-Marginal 
    Discounting Principle,
    INCREMENTAL CONCEPT
    Time perspective concept
    Marginal principles
    • Principle of time perspective: “a decision
    by the firm should take into account of both
    short-run and long-run effects on revenues
    and cost & maintain the right balance
    between the long run and short run.
    THE INCREMENTAL CONCEPT

    • . The Incremental Concept:


    • The incremental concept is probably the most important
    concept in economics and is certainly the most frequently
    used in Managerial Economics. Incremental concept is
    closely related to the mar­ginal cost and marginal revenues
    of economic theory.
    THE OPPORTUNITY COST PRINCIPLE

    • Both micro and macro economics make abundant use of the


    fundamental concept of opportunity cost. In everyday life,
    we apply the notion of opportunity cost even if we are
    unable to articulate its significance. 
    DISCOUNTING PRINCIPLES CONCEPTS

    • . Discounting Concept:
    • This concept is an extension of the concept of time
    perspective. Since future is unknown and
    incalculable, there is lot of risk and uncertainty in
    future. 
    EQUI MARGINAL CONCEPTS

    • One of the widest known principles of economics is


    the equi-marginal principle. The principle states
    that an input should be allocated so that value
    added by the last unit is the same in all cases. This
    generalisation is popularly called the equi-
    marginal.
    IMPORTANT OF TIME PERSPECTIVE
    PRINCIPAL
    • The time perspective concept states that the decision maker must give
    due consideration both to the short run and long run effects of his
    decisions. He must give due emphasis to the various time periods. It
    was Marshall who introduced time element in economic theory.
    • The economic concepts of the long run and the short run have become
    part of everyday language. Managerial economists are also concerned
    with the short run and long run effects of decisions on revenues as well
    as costs. The main problem in decision making is to establish the right
    balance between long run and short run.
    IMPORTANT OF TIME PERSPECTIVE
    PRINCIPLE
    • In the short period, the firm can change its output without changing its size. In the long period,
    the firm can change its output by changing its size. In the short period, the output of the
    industry is fixed because the firms cannot change their size of operation and they can vary only
    variable factors. In the long period, the output of the industry is likely to be more because the
    firms have enough time to increase their sizes and also use both variable and fixed factors.
    • In the short period, the average cost of a firm may be either more or less than its average
    revenue. In the long period, the average cost of the firm will be equal to its average revenue. A
    decision may be made on the basis of short run considerations, but may as time elapses have
    long run repercussions which make it more or less profitable than it at first appeared.
    ILLUSTRATION

    • Illustration:
    • The firm which ignores the short run and long run considerations will meet with failure can be
    explained with the help of the following illustration. Suppose, a firm having a temporary idle
    capacity, received an order for 10,000 units of its product. The customer is willing to pay only
    Rs. 4.00 per unit or Rs. 40,000 for the whole lot but no more.
    • The short run incremental cost (ignoring the fixed cost) is only Rs. 3.00. Therefore, the
    contribution to overhead and profit is Rs. 1.00 per unit (or Rs. 10, 000 for the lot). If the firm
    executes this order, it will have to face the following repercussion in the long run:

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