We study some important concepts of costs, and traditional and modern theories of cost. Gregory mankiws principles of microeconomics, 2nd edition, chapter 1 p. Resources are scarce, we cannot produce all the commodities. Twopart pricing, block pricing, bundling pricing, peak load pricing, cross subsidization.
The second definition establishes that economics is at the core of what managers of these organizations do. Meaning of opportunity cost and its economic significance. Opportunity cost of a decision is the sacrifice of alternatives required by that decision. There are five basic principles of economics that explain the way our world handles money and decides which investments are worthwhile and which ones arent. This implies that one commodity can be produced only at the cost of foregoing the production of another commodity. Managerial economics is the application of economic theory and methodology to decisionmaking problems faced by both public and private institutions. As adam smith observed, if a hunter can bag a deer or a beaver in the course of a single day, the cost of a deer is a beaver and the cost of a beaver is a. The purpose of managerial economics is to provide economic terminology and reasoning for the. Principles of managerial economics open textbooks for. Economic principles assist in rational reasoning and defined thinking. The text also includes many current examples, including. Opportunity cost is the minimum price that would be necessary to retain a factorservice in its given use.
Principles of managerial economics management study guide. Managerial economics global edition economic tools for todays decision makers. The opportunity cost of anything is the alternative that has been foregone. What is economics 1 opportunity cost 3 macroeconomics versus microeconomics 3 what is managerial economics 4. Opportunity cost principle opportunity cost is one of the most important and fundamental concepts in the. When the girl so drops by the way side one fruit and runs with the other, then the opportunity cost of the fruit she saves is the foregone alternative of the fruit she lost. Meaning, characteristics, scope and subject matter relationship with other disciplines decision making and forward planning fundamental principles of managerial economics.
Concepts and tools is intended as a textbook for managerial economics courses in business and management postgraduate progammes. This concept helps in selecting the best possible alternative from among various. Demand determinants, cost concepts, opportunity cost, fixed vs. For decisionmaking, opportunity costs are the only relevant costs. Economics is the study of how people use scarce resources to satisfy unlimited wants. It is more limited in scope as compared to microeconomics. Opportunity cost is just a notional idea which does not appear in the books of account of the company. The concept of opportunity cost microeconomics reading. Stated differently, an opportunity cost represents an alternative given up. The opportunity cost principle may be stated as under.
The study of managerial economics constitutes economics theories and analytical tools that are widely used for business decision making. The concept of opportunity cost plays an important role in managerial decisions. Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. This book presents economic concepts and principles from the perspective of managerial economics, which is a subfield of economics that places special emphasis on the choice aspect in the second definition. Opportunity cost principle is related and applied to scarce resource.
The quantity of a commodity that a rupee used to buy years ago has contracted. Economists use the term opportunity cost to indicate what must be given up to obtain something thats desired. Lf there are no sacrifices, there are no opportunity costs. Fundamental principles of business decision making opportunity cost. The concept is useful simply as a reminder to examine all reasonable alternatives before making a decision. At the core of economics is the idea that our world is a place plagued with scarcity that is, we do not have all the. Opportunity cost is a simple and one of the most significant concepts of microeconomics frank. A project on principles of managerial economics slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. The principle of opportunity cost in managerial economics may be stated as under.
Pdf bba managerial economics notes, ebook free download. Opportunity costs in managerial economics tutorial 05 may. Managerial economics studies the application of the principles, techniques and concepts of economics to managerial problems of business and industrial enterprises. Tools used in managerial economics economics discussion. Discounting principle economics l concepts l topics l. They develop logical ability and strength of a manager. If you could have spent the money on a different investment that would have generated a return. Macroeconomics deals with the performance, structure, and behavior of an economy as a whole. This is the book managerial economics principles v. Micro economics is a broader concept as compare to managerial economics. Opportunity cost is the profit lost when one alternative is selected over another. A kilo of sugar that could have been bought for rs 2 in the 1970s currently costs rs 40, while a dozen bananas that you could have bought for just rs 10 about 20 years ago, will now cost you rs 35. Therefore, both the concept of scarcity and opportunity cost are helpful in managerial economics in evaluating the various alternatives available when scarce economic resources are.
Addresses standard managerial economic questions involving pricing, advertising, scale, and the choice of inputs to employ in production. Some of the important economics tools which are used widely in managerial economics are as follows. Managerial economics and financial analysis pdf notes. Typically, the costs of using resources in production involve both outofpocket costs, or explicit costs, and other noncash costs, called implicit costs. How to use opportunity cost in business decision making. Suppose a shipbuilder gets a contract to be called contract a. Examine the application of the discounting principle and the principle of opportunity cost management. Opportunity cost can help you to rationalize your cost management decisions. Managerial economics principles 2012 book archive lardbucket. Articles on managerial economics management study guide. According to opportunity cost principle, a firm can hire a factor of production if and only if that factor earns a reward in that occupationjob equal or greater than its. If resource has no alternative use, then its opportunity cost is nil.
Managerial economics can be perceived as an applied micro economics. The basic principles of managerial economics are as follows i opportunity cost principle according to this principle, the cost involved in any decision consists of the sacrifices of alternatives required by that decision. Fundamental principles of business decision making. The cost involved in any decision consists of the sacrifices of alternatives required by that decision. Discounting principle in managerial economics one of the fundamental ideas in economics is that a dollar tomorrow is worth less than a dollar today. Managerial economics applies microeconomic theories and techniques to management decisions. Ud t id y c t mdtdtd u nders tan ding y our costs managers need to understand technology and prices paid for itf dtiinputs of production difference between variable and fixed costs. Pdf understanding the concepts of managerial economics. All of its branches including managerial economics develop models to help in the allocation of resources on economic rationales.
Since resources are scarce relative to needs,1 the use of resources in one way pre vents their use in other ways. Principles of economics covers the scope and sequence for a twosemester principles of economics course. If a gives twice as much pleasure as b, and there is no c that gives more pleasure than b and is comparable such as uses time, effort, or some other resource, then as. Opportunity cost principle economics l concepts l topics. Managerial economics and financial analysis notes pdf mefa notes pdf book starts with the topics definition, nature and scope of managerial economics demand analysis. Economics notes opportunity cost stephen palmer, james raftery the concept of opportunity cost is fundamental to the economists view of costs. Managerial economics chapters 1 3 flashcards quizlet. In choosing corporate policies, it is critical that managers anticipate potential responses by customers, suppliers, or employees that might produce undesirable outcomes.
Explain the concept of opportunity cost and explain why accounting profits and economic profits are not the same. Opportunity cost related to alternative uses of scarce resources opportunity cost of availing an opportunity is the expected income foregone from second best alternative difference between actual earning and its opportunity cost is called economic gain. If you continue browsing the site, you agree to the use of cookies on this website. Wages, utility expenses, payment for raw materials, interest paid to the holders of the firms bonds, and rent on a. Opportunity cost in economics can be defined as benefits or value missed out by. The following points highlight the seven fundamental concepts of managerial economics. Principles of economicsopportunity costs wikibooks. The importance of opportunity cost in decision making. When there are alternative uses of scarce resource, one should know which best alternative is and which is not. The opportunity cost of the value of opportunity lost is taken into consideration when alternatives are compared. In managerial economics, the opportunity cost concept is useful in decision involving a choice between different alternative courses of action. Originated from the arena of economics and socialism, the opportunity cost concept. In many of these discussions opportunity cost in exchange is emphasized, while the opportunity costs in production are not fully discussed and embellished.
The principle of opportunity cost mba knowledge base. Opportunity cost measures the value of the most valuable of the options that we have to forego in choosing from a set of alternative options. This seems similar to the saying that a bird in hand is worth two in the bush. Opportunity cost is a key concept in economics, and has been described as expressing the basic relationship between scarcity and choice. The opportunity cost of a decision means sacrificing alternatives. Chapter 7 the theory and estimation of cost 274 the importance of cost in managerial decisions 275 the definition and use of cost in economic analysis 277 historical versus replacement cost 277. The opportunity cost of investing in a healthcare intervention is best measured. We should know what gain by best alternative is and what loss by left alternative is.
Fundamental concepts in business decision making opportunity cost and decision rule 00. It is the purpose of this paper to expand upon the notion of opportunity cost in production and demonstrate that, under general conditions, the full costs of economic theory may often. The opportunity cost of a good or of performing an action, also known as the greatest cost, is the lost value of alternate options that could have been chosen, rather than the one that was chosen. In managerial decision making, the concept of opportunity cost occupies an important place. Principles of managerial economics linkedin slideshare. According to opportunity cost principle, a firm can hire a factor of production if and only if that factor earns a reward in that occupationjob equal or greater than its opportunity cost. Economics starts from the concept the scarcity of resources. Opportunity cost principle economics l concepts l topics l. Opportunity cost principle, incremental principal, principle of time perspective, discounting principle and equimarginal principle. This principle is of immense use in decisionmaking. When assessing opportunity cost, its important to keep these three things in mind. While the marginal principle definition might explain the very.
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