Basic Economic Tools in Managerial Economics

Basic Economic toolsin ‘Managerial Economics' To be very precise. Managerial Economics is ‘Economics applied in decision- making’. It fills the gap between economic theory and managerial practice. . It is the study of allocation of resources available to a firm among its activities.Managerial Economics Managerial Economics is a science which deals with the application of economics theory in managerial practice. Managerial Economics Economic Theories. Business management Concepts. Methodology Decision Problems and Tools Managerial Economics Application of Economics in analyzing and solving Business problems Optimum solutions to business problems . • It is a science as well as art facilitating better managerial discipline. It provides tools to help in identifying the best course among the alternatives and competing activities in any productive sector whether private or public. It explores and enhances economic mindfulness and awareness of business problems and managerial decisions. It is essentially applied micro economics. • It is concerned with firm’s behaviour in optimum allocation of resources. . micro economic analysis to practical problem solving in real business life.Characteristics of Managerial Economics • It involves an application of Economic theory – especially. Opportunity cost principle 2. Incremental principle 3. Discounting principle. Equi-marginal principle . Principle of time perspective 4.Basic Economic Tools in Managerial Economics 1. and 5. .  The opportunity cost of the time an entrepreneur devotes to his own business is the salary he could earn by seeking employment. Opportunity Cost Principle  The opportunity cost of the funds employed in one’s own business is the interest that could be earned on those funds had they been employed in other ventures.1.  The opportunity cost of using a machine to produce one product is the earnings forgone which would have been possible from other products. In actual business situations. for in real world business. . For instance. the labour which a contractor may change is not by one but by tens. in a construction project. one is concerned with not ‘unit change’ but ‘chunk change’. Incremental Principle Incremental concept is closely related to the marginal costs and marginal revenues. for of economic theory.2. it often becomes difficult to apply the concept of marginalism which has to be replaced by incrementalism. . The really important problem in decision- making is to maintain the right balance between the long-run and the short-run considerations.3. Managerial economists are also concerned with the short-run and long-run effects of decisions on revenues as well as costs. Principle of Time Perspective The economic concepts of the long run and the short run have become part of everyday language. This seems similar to saying that a bird in hand is worth two in the bush. Discounting Principle One of the fundamental ideas in economics is that a rupee tomorrow is worth less than a rupee today. A simple example would make this point clear.4. . 5. It should be clear that if the value of the marginal product is higher in one activity than another. an optimum allocation has not been attained. . be profitable to shift labour from low marginal value activity to high marginal value activity. thus increasing the total value of all products taken together. Equi-marginal Principle This principle deals with the allocation of the available resources among the alternative activities. therefore. It would. THANK YOU .