Module II: Fundamental Concepts of Managerial Economics
* Opportunity Costs, Incremental Principle, Time perspective, Discounting and Equi-Marginal principles. * Theory of the Firm: Firm and Industry, Forms of Ownership, Objectives of the firm, alternate objectives of firm. * Managerial theories: Baumol’s Model, Marris’s Hypothesis, Williamson’s Model. * Behavioral theories: Simon’s Satisficing Model, Cyert and March Model. * Agency theory.
* Opportunity cost principle
* Opportunity cost of a decision is the sacrifice of alternative course of action for that decision. It is the problem revenue from alternative sacrificed. * Opportunity cost may be defined as the revenue foregone or opportunity lost by not using the resources in second best alternative use. * Opportunity cost requires measurement of sacrifice. It measures the sacrifice made for making (taking) a decision. * Incremental principle
The incremental principle may be stated as follows:
A decision is clearly a profitable one if :-
* It increases revenue more than costs.
* It decreases some cost to a greater extent than it increases others. * It increases some revenues more than it decreases others. * It reduces costs more than revenues.
* Time Perspective
* The time perspective concept states that the decision maker must give due consideration both to the short run and long run effects of his decisions. He must give due emphasis to the various time periods. *
Equi -marginal principal
* The principle states that an input should be allocated so that value added by the last unit is the same in all cases. This generalization is popularly called the equi marginal. * Let us assume a case in which the firm has 100 units of labor at its disposal. And the firm is involved in five activities viz., A, B, C, D, and E. The firm can increase any one of these activities by employing more labor but only at the cost i.e., sacrifice of other activities. * Discounting concept
* This concept is an extension of the concept of time perspective. * It is simply that in the intervening period a sum of money can earn a return which is ruled out if the sum is available only at the end of the period. In technical parlance, it is said that the present value of one rupee available at the end of two years is the present value of one rupee available today. * The mathematical technique for adjusting for the time value of money and computing present value is called “discounting”. * Example
* Suppose you are offered a choice of Rs.1000 today or Rs. 1000 next year. Naturally, you will select Rs.1000 today. That is true because future is uncertain. * Theory of the firm
Meaning of a firm
A firm is an organization that combines and organizes resources for the purpose of producing goods and/or services for sale. * Firms can be classified as follows
* Small, medium and large
* Proprietorship (owned individually), partnership (owned by two or more individuals) and corporations (owned by stockholders), and * Public sector, private sector and joint sector.
* Economic objectives of a firm
* Maximum growth rate
* Desires for liquidity
* Non-economic objectives
of a firm
* Building up public confidence for the product
* Sound business practices
* Progressive management
* Baumol’s model (revenue maximizing model)
* There is a single time horizon of the firm.
* The firm aims at maximizing its total sales revenue in the long run subject to a profit constraint. * The firm is oligopolistic whose cost curves are u-shaped and the demand curve is downward slopping. Its total cost and revenue curves are also of the conventional type. * Advertisement is a major instrument of the firm as non-profit competition is the typical form of competition in oligopolistic markets. * Production costs are...
Please join StudyMode to read the full document