SO M E
FU N DA M EN TA L
CONCEPTS USED
IN
BUSINESS
Learning
Objectives
Opportunity cost and Decision Rule.
Managerial Principle and Decision Rule
Incremental principle and Decision
Rule
Concept of contribution analysis
Equi-marginal principle in business
decisions
Time perspective in business decisions
Managerial
Decision
Rule of
Thumb
Techniq
ue
Busines
s
Decisio
n
Sophisticat
ed
Technique
Opportunity
Cost
Opportunity Cost
and Economic
Gain
• Opportunity cost is the
Scarcity
of income lost due to the
Resource best obtained from the
s alternate use of a
particular resource.
• Opportunity cost concept
Alternativ can be applied to all those
e business decisions, which
Choices
involve at least two
alternative benefit.
Opportunit • The difference between
y Cost actual earning and its
opportunity cost is called
Economic Profit(gain).
• Economic Profit is
important when
opportunity cost is
neither insignificant nor
large.
Marginal Principle and Decision
Rule
Marginal
Principle Margina
• Marginal Concept : l Utility
in
Change in total quantity Consum
or value due to unit er
change in it’s determinant. Analysis
• Marginal Cost(MC)
=TCn-TCn-1
• Marginal Revenue(MR)
=TRn-TRn-1 Margina
Limitations in Decision l
Making Concep
Marginal t Marginal
• Marginal Concept can be Revenue Cost in
used where TC and TR is in Productio
Pricing n
known for each and every Theory Analysis
unit produced.
• Marginal Concept can be
applied to a situation in
which only the variable
cost changes.
Incremental Principle and Decision
Rule
Incremental principle is applied only in
decisions related to bulk production whose
total cost and total revenue are expected to
increase.
Increase in the total cost and total revenue is
called incremental cost and incremental
revenue, respectively.
Incremental cost has three components:
• Current explicit costs
• Opportunity cost
• Future costs
Incremental reasoning is applied in
business decisions mainly while accepting
or rejecting a business proposal.
Contribution
Analysis
Contributio
n
Increment Increment
al al
Revenue Cost
Relevant incremental
costs:
Current explicit Future incremental
costs Opportunity costs costs
Relevant incremental
revenues:
Explicit current Possible future
revenue Possible opportunity revenue revenue
Equi-marginal
Principle
The principle states that
The combination of
the inputs of the firm
equi- marginal
must be allocated in
principle and
such a way
consumption theory
that their marginal
gives the law of equi-
productivity is same in
marginal utility.
each alternative use.
This principle is applied
This helps in equalizing by the firms because
the gains from the they have limited
marginal productivity resources that have
gains from various alternative uses
activities. subjected to
diminishing marginal
productivity or returns.
Equi-marginal
Principle
1. Under the condition of three projects –A, B and
C –with same cost
Rule : MPA MPB MPC
(MP=Marginal Productivity)
2. Under the condition of three projects –A, B and
C –with
different cost(C)
MPB
MPA
Rule :
MPC
CA CB CC
Time Perspective in Business
Decisions
Time Perspective
Relevant Past Foreseeable Future
Lon
g Projection
Run
Shor
t
Run
Summar
y
Managerial decision involves rule of thumb technique
and sophisticated technique
Opportunity cost is the income that can be obtained from
the second alternate use of a particular resource.
Marginal Concept : Change
Understand the conceptinoftotal quantity or value due to
managerial
unit change ineconomics
it’s determinant.
Incremental principle is applied only in decisions related to
bulk production whose total cost or total revenue are expected
to increase.
Contribution is difference between incremental revenue
and incremental cost
The equi-marginal principle states that equi-marginal
productivity of inputs in all alternative uses must be the same.