unit i principles

8/11/2019 Unit I Principles

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ECONOMIC

PRINCIPLES

By

Mrs. N. Jayaprada


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Relevant to Managerial

Decisions

Concept of scarcity

Concept of Opportunity Cost

Incremental concept

Marginalism Equi marginalism

Time perspective

Discounting Principle

Risk and Uncertainty

Profits


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Concept of scarcity

Human wants are unlimited, but human capacityto satisfy such wants is limited.

Business firmsresources available are limited,

and the managers need to optimally utilise them.

ConsumersMaximum satisfaction

FirmsMaximum output

Resource

s

availableDemand for resources


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Concept of Opportunity

Cost/Alternative Cost

Benefit forgone from the next best alternative

that is not selected.

Cost of sacrificingone alternative.

Quality Vs Quantity

Premium(classes) Vs Popular

products(masses)

Skimming price Vs Penetration Price

ex: Reliance and Tata Indicom

Scarce resources Unlimited wants

Ration

alchoice

s


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ro uc on oss yCurve/Frontier

(PPC/PPF)For society/EconomyA graph that shows the different combinations

of the quantities of two goods that can be

produced(or consumed) in an economy,subject to limited availability of resources.

For individual

The different combinations of two commodities

that the individual can have, with a givenincome or budget, and at a given prices of thecommodities being purchased.


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Equi-marginal principle

Consumer behaviour

The Law of Equi-Marginal Utility is an extension to

the law of diminishing marginal utility.

It states that

A consumer distributes his consumptionexpenditure between various goods and services

he/she consumes in such a way that the marginal

utility derived from each unit of expenditure on

various goods and services is the same.

The pattern of consumers expenditure maximizes a

consumers total utility.


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For Firm

The law of equi-marginal principle has beenapplied to the allocation of resourcesbetween their alternative uses with a view to

maximizing profit in case a firm carries outmore than one business activity.

This principle suggests that availableresources(inputs) should be so allocated

between the alternative options that themarginal productivity gain(MP) from thevarious activities are equalized


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Incremental concept &Marginalism

Incremental concept

Increase in total cost or revenueas a bulk

incremental cost and revenue of online

selling

Maginality

A unit change in cost or revenue or utility

Increase in total cost or revenue due to

change in output - as a unit

MC=Change in total Cost/change in Total

Output


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Discounting Principle

Time value of money

Value of money depreciates with time.

Business decisions relate to outflow and inflow

of money and resources that take place at

different points of time.

Discounts future inflows to their present value

level. PVF=1/(1+r)n Where PVF=Present Value

Factor

n=Period

r= Rate of interest


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Time Perspective

Long run and short run

Short runperiod within which some of the

inputs canntbe altered - fixed inputs

Long runperiod within which inputs can be

changedno fixed inputs

Right Balance between short and long run

Ex: Profit maximisation - shortrun

Profitability maximisation - longrun


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Risk and Uncertainty

Risk

Possibility of getting loss

Common to every business

Can be planned and managed

Business risk, market risk, political risk,

systematic risk, unsystematic risk

Uncertainty

Situation of unpredictable

Cant be planned and managed.


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Profits

It is the return to the entrepreneur for the use of hisentrepreneurial abilityEconomists

An economicprofit arises when revenueexceeds theopportunity cost of inputs. Profit =Income-Expenses

Kinds of profitEarnings of management

Windfall profits

Monopoly profits

Functional Reward Concepts of profits - Gross profits, Net profits,

Operating profits

Normal and Abnormal profits

Abnormal profits = Actual profitsNormal Profits
http://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Revenue


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Profits

Necessary for survival of firm in the long run.

Indicator of financial health and growth.

Index of performance of the firm.

Premium to cover costs of staying in business

and

It ensures supply of re-investible capital.


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Thank you

unit i principles

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