6/17/2023 0 Comments Economic principle definition![]() ![]() Opportunity cost is the minimum price that would be necessary to retain a factor-service in its given use. ![]() If there are no sacrifices, there is no cost.Īccording to Opportunity cost principle, a firm can hire a factor of production if and only if that factor earns a reward in that occupation/job equal or greater than its opportunity cost. Thus, a manger can make rational decision by allocating/hiring resources in a manner which equalizes the ratio of marginal returns and marginal costs of various use of resources in a specific use.īy opportunity cost of a decision is meant the sacrifice of alternatives required by that decision. Where, MRP is marginal revenue product of inputs and MC represents marginal cost. Similarly, a producer who wants to maximize profit (or reach equilibrium) will use the technique of production which satisfies the following condition: Where, MU represents marginal utility and P is the price of good. It states that the consumer will spend his money-income on different goods in such a way that the marginal utility of each good is proportional to its price, i.e., The laws of equi-marginal utility states that a consumer will reach the stage of equilibrium when the marginal utilities of various commodities he consumes are equal.Īccording to the modern economists, this law has been formulated in form of law of proportional marginal utility. Marginal Utility is the utility derived from the additional unit of a commodity consumed. Incremental principle states that a decision is profitable if revenue increases more than costs if costs reduce more than revenues if increase in some revenues is more than decrease in others and if decrease in some costs is greater than increase in others. For example - adding a new business, buying new inputs, processing products, etc.Ĭhange in output due to change in process, product or investment is considered as incremental change. It refers to changes in cost and revenue due to a policy change. Incremental analysis is generalization of marginal concept. Incremental analysis differs from marginal analysis only in that it analysis the change in the firm's performance for a given managerial decision, whereas marginal analysis often is generated by a change in outputs or inputs. If the marginal revenue is greater than the marginal cost, then the firm should bring about the change in price. The decision of a firm to change the price would depend upon the resulting impact/change in marginal revenue and marginal cost. ![]() Marginal cost refers to change in total costs per unit change in output produced (While incremental cost refers to change in total costs due to change in total output). Marginal revenue is change in total revenue per unit change in output sold. ![]() Marginal generally refers to small changes. Marginal analysis implies judging the impact of a unit change in one variable on the other. If total revenue declines less than total cost.If total revenue increases more than total cost.This principle states that a decision is said to be rational and sound if given the firms objective of profit maximization, it leads to increase in profit, which is in either of two scenarios. Some important principles of managerial economics are: They develop logical ability and strength of a manager. Economic principles assist in rational reasoning and defined thinking. ![]()
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