Opportunity Cost • The opportunity cost of any alternative is defined as the cost of not selecting the "next-best" alternative. • The term “marginal” refers to the change (increase or decrease ) in the total of any quantity due to a one unit change in its determinant
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Marginal analysis
• Marginal benefit = additional benefit
resulting from a one-unit increase in the level of an activity • Marginal cost = additional cost associated with one-unit increase in the level of an activity Incremental Principle • Similar to the marginal value concept • Marginal Principle is only applicable where MC and MR are known. • In general firms do not have the knowledge of MC and MR
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Incremental Principle • Incremental Cost • Incremental Revenue • 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.
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Time perspective
• Time is an important factor in business
decision making. A timely decision is always important and rewarding, if appropriate. • Long Run • Short Run Time Perspective • According to this principle, a manger/decision maker should give due emphasis, both to short- term and long-term impact of his decisions, giving apt significance to the different time periods before reaching any decision. • Short-run refers to a time period in which some factors are fixed while others are variable • long-run is a time period in which all factors of production can become variable Discounting Principle
• A present gain is valued more than a future gain.
• According to this principle, if a decision affects costs and revenues in long-run, all those costs and revenues must be discounted to present values before valid comparison of alternatives is possible. • This is essential because a rupee worth of money at a future date is not worth a rupee today. Money actually has time value Equi-marginal principle
• Its very significant in determining optimal condition in
resource allocation. • Marginal Utility is the utility derived from the additional unit of a commodity consumed. 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. • 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.