Opportunity Cost Time Value Of Money Marginalism Incrementalism

1. Basic Economic Tools in Business Economics
1.Opportunity Cost
2.Time Value Of Money
3.Marginalism
4.Incrementalism

2. Opportunity Cost

3. Opportunity Cost is what you give up
because you choose to do something else .
Everything you do has an Opportunity
Cost .
The opportunity cost of a given sum of
money can never be zero.
 The cost of an alternative that must be
forgone in order to pursue a certain
action. Put another way, the benefits you
could have received by taking an
alternative action.

4. Example of Opportunity Cost
 Tony buys a pizza and with that same amount of money he could have
bought a Coke and a hot dog. The opportunity cost is the Coke and hot
dog.
 At the ice cream parlor, you have to choose between mango and
strawberry. When you choose mango, the opportunity cost is the
enjoyment of the strawberry.
 For a farmer choosing to plan corn, the opportunity cost would be any
other crop he may have planted, like wheat
 David decides to quit working and got to school to get further training.
The opportunity cost of this decision is the lost wages for a year.

6. Time Value Of Money
 One of the fundamental ideas in economics is that a
rupee tomorrow is worth less than a rupee today.
 The time value of money is the value of money with
the given amount of the interest on inflation occurred
over a amount of time.
 The ultimate principal suggest that a certain amount
of money today as different buying power that the
same amount of money in the future.
 There is an opportunity to earn interest on the
money and because inflation will drive prices up thus
changing the value of money.

7. Example
Suppose a person is offered a choice to
make between a gift of Rs.100 today or
Rs.100 next year. Naturally he will
choose the Rs.100 today. This is true for
two reason . First ,the future is uncertain
and there may be uncertainty in getting
Rs.100 if the present opportunity is not
availed of. Secondly , even if he is sure to
receive the gift in future, today Rs.100
can be invested so as to earn interest say
at 8% so that one year after the Rs.100 of
today will become Rs.108 .
Another way of saying the same thing is
that Rs.100 one year hence is not equal to
Rs.100 of today but less than that.

8. Marginalism
 When the resources are scare, manager have to be careful about utilizing
each and every additionally unit of resources or input. For example if one has
to decide whether an additional man-hour or machine-hour is to be used ,it
is necessary to ascertain what is the additional output expected from it. For all
such additional magnitudes of output or return, economists use the term
“marginal”.
 It is a theory of economic, that attempts to explain the goods and services by
reference to their secondary or marginal utility
 For example = why the price of diamonds is higher than that of water . When
resources are limited manager have to carefully decide about utilizing each
and every additional unit of resources.

9. Incrementalism
 Incremental concept involves estimating the impact of decision
alternatives on cost and revenue, emphasizing the changes in total cost
and total revenue resulting from changes in prices ,product, procedures,
investments or whatever may be at stake in the decision. The two basic
component of incremental reasoning are: incremental cost and
incremental revenue.
 Incremental cost may be defined as the change in total cost resulting
from a particular decision.
 Incremental revenue is the change in total revenue resulting from a
particular decision.

10. Example
If a firm decides to go for
computerization of
market information, the
additional revenue it
earns will be termed
incremental revenue and
the extra cost of setting
up computer facilities will
be termed incremental
cost.