Question

important concepts underlying in managerial economics

Answer 1

Managerial economics is the study of economic theories, logic and tools of economic analysis that are used in the process of business decision making. The following are the basic concepts of managerial economics.

1 Incremental Concept.

This is most important and frequently used concept in managerial economics. The incremental concept is related to incremental cost and incremental revenue. Incremental cost explains the increase in cost and incremental revenue explains the increase in revenue from an economic decision. A decision regarding cost or revenue is considered to be profitable if it increase the revenue more than cost or reduce the cost more than revenue.

2. Concept of time.

Before taking a decision the decision the managers must consider to the shortrun and longrun effects of his decision. The shortrun is a period which is short enough to change the plant size. But a longrun is a period which is enough for the change in plant size. In shortrun the firm can meet the increased demand only by changing the amount of variable factors. In shortrun due to fixed supply the average revenue may be higher than the average cost. But in longrun since the supply increase with the increase in demand the average revenue will be equal to the average cost. Hence these shortrun and longrun effects should be considered before taking a decision.

3. The concept of opportunity cost.

The concept of opportunity cost is helpful for a choice of decision. Since the resources are scarce a firm cannot produce all commodities at once. It has to sacrifice the production of one commodity for the production of other. Thus opportunity cost is the benefit foregone for the production of one commodity. The managers have to consider the net loss of benefit while it chooses a decision.

4. Equi-marginal concept.

This concept explains that the inputs should be allocated in various fields of production in such a way that the marginal product of the input is same in all activities. This concept is known as the equi-marginal concept.

5. Risk of uncertainty.

A business faces risk arises from uncertainty. This uncertainty is related to the business cycle, changes in the structure of the economy, government policies, uncertainty in production, market prices and new entry of firms and the strategies of the rival firms. Thus the managers must take a decision by considering the risk which arises from the uncertainty. Thus the managers are expected to have perfect knowledge about these uncertainties.