Incremental principle of managerial economics

Incremental cost may be defined as the change in total cost resulting from a particular decision. One of the fundamental principles of economics is the proposition that in input such as labour it should be so allocated among different activities or lines of production that the value added by the last unit is the same in all uses.

The cost of production from this order is: Rs.

Incremental cost principle in managerial economics

Some writers equate O. Although this high incremental cost of funds is perhaps surprising, it is not unusual. Practice Test The marginal concept is a key component of the economic decision-making process. Let us assume you can earn 10 per cent interest during a year. This concept of O. Suppose a shipbuilder gets a contract to be called Contract A. As the market discount rates vary, bond price, vary inversely. Suppose, in the meantime, two other contracts, B and C, have been brought to his attention. It is related to the marginal cost and marginal revenue concepts in economic theory. Total profit increases so long as incremental profit is positive. In fact, everything in the real commercial world is negotiable, such as housing prices and terms and conditions of payment, equipment parts, specifications, and prices.

Incremental analysis involves examining the impact of alternative managerial decisions or courses of action on revenues, costs, and profit. For example, assume that the excess warehouse space described earlier came about following a downturn in the overall economy.

These wages were in the nature of a fixed cost and were not included in the O.

principle of management and managerial economics

A refusal to accept business below full cost may mean rejection of a possibility of adding more to revenue than cost. Opportunity cost of a decision is the sacrifice of alternatives required by that decision. As more and more units of the variable factor here labour are added in the production fixed factor remaining unchanged each extra unit of labour makes less and less extra contribution to the total product.

Opportunity cost principle

We also find an application of the principle in multiple product pricing. Practice Test The marginal concept is a key component of the economic decision-making process. Thus the only costs for decision-making are opportunity costs. When incremental profit is negative, total profit declines. The Concept of Negotiation Principle: Changes in costs and revenues, all commitments made in the short or long run, interest rates, net cash flows, the contribution margin that product E could should make to the overall profitability of company, are all negotiable. Suppose, a firm having a temporary idle capacity, received an order for 10, units of its product. In case there is no sacrifice, there is no cost either.
Rated 8/10 based on 99 review
Download
Managerial Economics: 6 Basic Principles of Managerial Economics