Basic Economic tools

in
Managerial Economics'
Managerial Economics
Managerial Economics is a science which deals
with the application of economics theory in
managerial practice. It is the study of allocation
of resources available to a firm among its
activities. To be very precise, Managerial
Economics is Economics applied in decision-
making. It fills the gap between economic
theory and managerial practice.
Managerial Economics
Economic Theories,
Business management
Concepts, Methodology
Decision Problems
and Tools

Managerial Economics
Application of Economics
in analyzing and solving
Business problems

Optimum solutions to
business problems
Characteristics of Managerial Economics
It involves an application of Economic theory
especially, micro economic analysis to practical
problem solving in real business life. It is
essentially applied micro economics.
It is a science as well as art facilitating better
managerial discipline. It explores and enhances
economic mindfulness and awareness of business
problems and managerial decisions.
It is concerned with firms behaviour in optimum
allocation of resources. It provides tools to help in
identifying the best course among the alternatives
and competing activities in any productive sector
whether private or public.
Basic Economic Tools in Managerial Economics

1. Opportunity cost principle

2. Incremental principle
3. Principle of time perspective
4. Discounting principle, and
5. Equi-marginal principle
1. Opportunity Cost Principle
The opportunity cost of the funds employed
in ones own business is the interest that could
be earned on those funds had they been
employed in other ventures.
The opportunity cost of the time an
entrepreneur devotes to his own business is the
salary he could earn by seeking employment.
The opportunity cost of using a machine to
produce one product is the earnings forgone
which would have been possible from other
products.
2. Incremental Principle
Incremental concept is closely related to the
marginal costs and marginal revenues, for of
economic theory. In actual business situations,
it often becomes difficult to apply the concept
of marginalism which has to be replaced by
incrementalism, for in real world business, one
is concerned with not unit change but chunk
change. For instance, in a construction project,
the labour which a contractor may change is
not by one but by tens.
3. Principle of Time Perspective
The economic concepts of the long run and the
short run have become part of everyday
language. Managerial economists are also
concerned with the short-run and long-run
effects of decisions on revenues as well as
costs. The really important problem in decision-
making is to maintain the right balance
between the long-run and the short-run
considerations.
4. Discounting Principle
One of the fundamental ideas in economics is
that a rupee tomorrow is worth less than a
rupee today. This seems similar to saying that a
bird in hand is worth two in the bush. A simple
example would make this point clear.
5. Equi-marginal Principle
This principle deals with the allocation of the
available resources among the alternative
activities. It should be clear that if the value of
the marginal product is higher in one activity
than another, an optimum allocation has not
been attained. It would, therefore, be profitable
to shift labour from low marginal value activity
to high marginal value activity, thus increasing
the total value of all products taken together.
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