If you continue browsing the site, you agree to the use of cookies on this website. Opportunity costs in managerial economics tutorial 05 may. Examine the application of the discounting principle and the principle of opportunity cost management. Discounting principle in managerial economics one of the fundamental ideas in economics is that a dollar tomorrow is worth less than a dollar today. Discounting principle economics l concepts l topics l. Fundamental principles of business decision making opportunity cost. Pdf understanding the concepts of managerial economics. Meaning, characteristics, scope and subject matter relationship with other disciplines decision making and forward planning fundamental principles of managerial economics. Opportunity cost principle opportunity cost is one of the most important and fundamental concepts in the. 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. All of its branches including managerial economics develop models to help in the allocation of resources on economic rationales.
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. Managerial economics studies the application of the principles, techniques and concepts of economics to managerial problems of business and industrial enterprises. Twopart pricing, block pricing, bundling pricing, peak load pricing, cross subsidization. A project on principles of managerial economics slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. Managerial economics and financial analysis notes pdf mefa notes pdf book starts with the topics definition, nature and scope of managerial economics demand analysis. 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. Resources are scarce, we cannot produce all the commodities.
This seems similar to the saying that a bird in hand is worth two in the bush. Some of the important economics tools which are used widely in managerial economics are as follows. Managerial economics chapters 1 3 flashcards quizlet. The concept of opportunity cost microeconomics reading. Macroeconomics deals with the performance, structure, and behavior of an economy as a whole. Principles of economicsopportunity costs wikibooks. Opportunity cost of a decision is the sacrifice of alternatives required by that decision. Fundamental principles of business decision making. Economics is the study of how people use scarce resources to satisfy unlimited wants. Opportunity cost is just a notional idea which does not appear in the books of account of the company. Economics starts from the concept the scarcity of resources. The cost involved in any decision consists of the sacrifices of alternatives required by that decision. It is more limited in scope as compared to microeconomics. The opportunity cost of a decision means sacrificing alternatives.
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. Managerial economics and financial analysis pdf notes. 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. How to use opportunity cost in business decision making.
When assessing opportunity cost, its important to keep these three things in mind. The opportunity cost principle may be stated as under. Gregory mankiws principles of microeconomics, 2nd edition, chapter 1 p. Opportunity cost can help you to rationalize your cost management decisions. Opportunity cost is the minimum price that would be necessary to retain a factorservice in its given use. Managerial economics global edition economic tools for todays decision makers. Lf there are no sacrifices, there are no opportunity costs. 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. In managerial decision making, the concept of opportunity cost occupies an important place. 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. Almost every undergraduate introductory economics course begins the same way. They develop logical ability and strength of a manager.
For decisionmaking, opportunity costs are the only relevant costs. Economic principles assist in rational reasoning and defined thinking. Economists use the term opportunity cost to indicate what must be given up to obtain something thats desired. In choosing corporate policies, it is critical that managers anticipate potential responses by customers, suppliers, or employees that might produce undesirable outcomes. Demand determinants, cost concepts, opportunity cost, fixed vs. Opportunity cost is the profit lost when one alternative is selected over another. The importance of opportunity cost in decision making. 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. Opportunity cost principle is related and applied to scarce resource. 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. We study some important concepts of costs, and traditional and modern theories of cost. Managerial economics is the application of economic theory and methodology to decisionmaking problems faced by both public and private institutions.
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. 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. Stated differently, an opportunity cost represents an alternative given up. The opportunity cost of anything is the alternative that has been foregone. Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. This is the book managerial economics principles v. Pdf bba managerial economics notes, ebook free download. 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. 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. In many of these discussions opportunity cost in exchange is emphasized, while the opportunity costs in production are not fully discussed and embellished.
Meaning of opportunity cost and its economic significance. Opportunity cost is a simple and one of the most significant concepts of microeconomics frank. Managerial economics principles 2012 book archive lardbucket. Opportunity cost in economics can be defined as benefits or value missed out by.
This concept helps in selecting the best possible alternative from among various. Principles of economics covers the scope and sequence for a twosemester principles of economics course. When there are alternative uses of scarce resource, one should know which best alternative is and which is not. Managerial economics can be perceived as an applied micro economics. We should know what gain by best alternative is and what loss by left alternative is.
If resource has no alternative use, then its opportunity cost is nil. If you could have spent the money on a different investment that would have generated a return. Opportunity cost principle, incremental principal, principle of time perspective, discounting principle and equimarginal principle. The purpose of managerial economics is to provide economic terminology and reasoning for the. Since resources are scarce relative to needs,1 the use of resources in one way pre vents their use in other ways. Originated from the arena of economics and socialism, the opportunity cost concept. Explain the concept of opportunity cost and explain why accounting profits and economic profits are not the same. The concept of opportunity cost plays an important role in managerial decisions.
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. What is economics 1 opportunity cost 3 macroeconomics versus microeconomics 3 what is managerial economics 4. The second definition establishes that economics is at the core of what managers of these organizations do. Typically, the costs of using resources in production involve both outofpocket costs, or explicit costs, and other noncash costs, called implicit costs. Addresses standard managerial economic questions involving pricing, advertising, scale, and the choice of inputs to employ in production. Concepts and tools is intended as a textbook for managerial economics courses in business and management postgraduate progammes. Fundamental concepts in business decision making opportunity cost and decision rule 00. Principles of managerial economics open textbooks for. Economics notes opportunity cost stephen palmer, james raftery the concept of opportunity cost is fundamental to the economists view of costs. The principle of opportunity cost in managerial economics may be stated as under. The following points highlight the seven fundamental concepts of managerial economics. 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. Tools used in managerial economics economics discussion. 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.
While the marginal principle definition might explain the very. The opportunity cost of investing in a healthcare intervention is best measured. This implies that one commodity can be produced only at the cost of foregoing the production of another commodity. Opportunity cost principle economics l concepts l topics l. Micro economics is a broader concept as compare to managerial economics. The quantity of a commodity that a rupee used to buy years ago has contracted.
Principles of managerial economics management study guide. In managerial economics, the opportunity cost concept is useful in decision involving a choice between different alternative courses of action. The text also includes many current examples, including. The principle of opportunity cost mba knowledge base. Articles on managerial economics management study guide. The concept is useful simply as a reminder to examine all reasonable alternatives before making a decision. The opportunity cost of the value of opportunity lost is taken into consideration when alternatives are compared. The study of managerial economics constitutes economics theories and analytical tools that are widely used for business decision making. Managerial economics applies microeconomic theories and techniques to management decisions.
4 1370 12 226 1444 947 1061 1005 104 1446 399 751 1125 1522 734 885 829 650 1202 1485 1120 1275 1198 1326 501 1530 1414 410 849 468 942 148 1338 539 1057 760 497