Beruflich Dokumente
Kultur Dokumente
Chapter 1
Economic Theory and Principles Demand Analysis Cost analysis Production and supply analysis Consumer behavior Market structure Distribution theories
Managerial Economics
(Application of Economic Principles to address managerial decision dilemmas and solve business problems)
What will be the likely demand for a new product ? How much quantity to be produced? What production technique/technology should be used? what is the best location for a new plant? How much the new product be priced? How to allocate available capital? etc
Micro Economic in character Pragmatic and application oriented in nature Normative in approach Takes into account Macro Economic factors
Cost analysis
Consumer behavior
To involve in specific business operations like production and capacity planning, product mix determination, ` etc.
It is the benefit foregone due to the alternative not selected Always used in all decisions involving choice Can be implicit or explicit, real or monetary, quantifiable or nonquantifiable
The concept of marginality deals with a unit increase in cost or revenue or utility. The principle of Equi-marginality deals with allocation of resources among the alternatives. It prescribes that the resources should be so allocated that the value added by the last unit is the same for all alternatives.
Incremental Principle
This principle is an extension to the concept of marginalism. The difference is it consider chunk change and not the Unit Change. This is more suitable to business decision making as decision variable are not subject to unit change but to bulk change.
This principle states that business decisions should take into consideration both short-run and long-run affects on cost (revenue, production etc) to maintain a right balance.
Discounting Principle
This Principle takes into consideration the time value of money. It suggests that if a decision generates outcomes in future dates then it is necessary to discount future value of such outcome to arrive at the present value of the outcome before a valid comparison of alternatives can be drawn.
2
3 4 5 6 7
5
9 14 22 40 57
2.5
3.0 3.5 4.4 6.7 8.1
3
4 5 8 18 17
8
9 10
63
64 63
7.9
7.1 6.3
6
1 -1
EXERCISE
A Manufacturer of personal computers has an inventory of 10,000 hard drives that sold for 1000/- per unit last year. The current price is not more than 700/-. By adding one of these drives to their stock of personal computers, the price of each computer is increased by 800/- per unit. Should the drivers be added? What is the opportunity cost of these drivers? Explain?
An pension scheme offers you three payment options against a one time premium paid today.
1. 180000/- each year for the next 12 years 2. 150000/- each year for the next 18 years 3. 110000/- each year for the next 12 years and alum-sum payment of 8,10,000/- at the end of 18th year. Which option will you choose? Explain? what should be the premium to be paid today.