This document discusses basic concepts in economics and managerial economics. It defines key terms like scarcity, choice, opportunity cost, and resource allocation. Scarcity means resources are limited, which forces individuals and societies to make choices that incur a cost of alternatives forgone known as opportunity cost. Managerial economics helps managers make rational decisions by considering incremental costs and revenues, marginal analysis, equi-marginal returns, and accounting for time perspectives and discounting of future values. Decisions can involve a company's internal operations or external environment. Overall, the document provides an overview of foundational economic principles useful for management decision making.

1. Basic concepts in Economics
&
Basic concepts in Managerial Economics
Prepared By
Mohammed Jasir PV
Asst. Professor
MIIMS, Puthanangadi
Contact: 9605 693 266

2. Basic concepts in Economics
– SCARCITY
– CHOICE
– RESOURCE ALLOCATION
– TRADE OFF
– OPPORTUNITY COST

3. SCARCITY
• Scarcity refers to the basic economic problem
• Resources are limited and scarce
• Needs and wants are unlimited
• This situation requires people to make decisions about how to allocate
resources efficiently, in order to satisfy basic needs and as many additional
wants as possible.

4. CHOICE
• Resources are scarce and the available resources have alternative uses
• Thus the consumer forced to choose the best from available alternative.

5. Due to scarcity of resources , human beings are
forced to make a choice. Choice involves a
trade-off between costs and benefits. This will
lead to giving up something to get something
else.
Trade-off means giving up one goods or activity to
obtain some good or another activity or
accepting less of one thing for more of another.
Trade –off

6.  Thus scarcity leads to choice,
 Choice leads to trade off,
 Which in turn leads to opportunity cost.

7. Opportunity cost
 It is the cost of next best alternative which has been given up.
 It is the value of alternative foregone in order to have something else
 The cost of next best alternative forgone

9. • It is the earning that would be realized if the available resources were put to some
other use. Thus opportunity cost is measures in terms of the sacrifice made behind
the decision.
• Consider that a person has invested a sum of Rs. 50,000 in shares. Let the expected
annual return by this alternative be Rs. 7,500. If the same amount is invested in a
fixed deposit, a bank will pay a return of 18%. Then, the corresponding total return
per year for the investment in the bank is Rs. 9,000. This return is greater than the
return from shares. The foregone excess return of Rs. 1,500 by way of not investing
in the bank is the opportunity cost of investing in shares.

10. Resource Allocation
• Analysis of how scarce resources are
distributed among producers
• How scarce goods and services are apportioned
among consumers
• This analysis takes into consideration the
accounting cost, economic cost, opportunity
cost, and other costs of resources and goods and
services

11. Managerial Economics and Decision Making
Decision making on internal
affairs.
• Internal affairs talk on internal
environment which consists of internal
factors such as, Production, Financial,
Marketing and Human resource
related decisions.
Decision making on external
affairs.
• External Affairs talk on external
environment which consists of external
factors such as, PEST related decisions.

12. Basic Principles of Managerial Economics
• Opportunity cost principle
• Incremental principle
• Marginalism principle
• Equi-marginalism principle
• Time perspective principle
• Discounting principle

13. Incremental principle
 Incremental cost
 Incremental Revenue
While taking a decision, a manager always determines the decision on the
basis of criterion that the incremental revenue should exceed
incremental cost.

14. Incremental Principle
• This principle states that a decision is said to be rational and sound if given the
firm’s objective of profit maximization, it leads to increase in profit, which is in
either of two scenarios-
– If total revenue increases more than total cost
– If total revenue declines less than total cost

15. • The two basic concepts in the incremental analysis are : incremental cost and
incremental revenue.
• Use of Incremental Reasoning
• While taking a decision, a manager always determines the worthiness of a
decision on the basis of criterion that the incremental revenue should exceed
incremental cost.
Incremental cost may be
defined as the change in total
cost as a result of change in
the level of output,
investment, etc
Incremental Revenue is
change in total revenue
resulting from change in
level of output , price etc.

16. Marginalism principle
• Marginal analysis implies judging the impact of a unit change in one variable on
the other.
• Marginal generally refers to small changes.
• Marginal revenue
• Marginal cost
• The decision of a firm to change the price would depend upon the resulting
impact/change in marginal revenue and marginal cost.
• If the marginal revenue is greater than the marginal cost, then the firm should
bring about the change in price

17. Equi-marginalism Principle
• According to the modern economists, this law has been formulated in form
of law of proportional marginal utility.
• It states that the consumer will spend his money income on different goods
in such a way that the marginal utility of each good is proportional to its
price, i.e.,

18. Time Perspective
• Economists often make a distinction between short run and long run.
• Short run means that period within which some of the inputs (called
fixed inputs) cannot be altered.
• Long run means that all the inputs can be changed.
• Economists try to study the effect of policy decisions on variables like
prices, costs, revenue, etc, in the light of these time distinctions.

19. • The law of equi-marginal utility states that a utility maximizing consumer
distributes his consumption expenditure 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 service is the same.
• This principle suggests that available resources (inputs) should be allocated
between the alternative options that the marginal productivity (MP) from the
various activities are equalized.
• The laws of equi-marginal utility states that a consumer will reach the stage of
equilibrium when the marginal utilities of various commodities he consumes are
equal

20. Discounting Principle
• The concept of discounting future is based on the fundamental fact that a
rupee now is worth more than a rupee earned a year after.
• Unless these returns are discounted to find their present worth, it is not
possible to judge whether or not it is worth undertaking the investment
today.

21. Managerial Economics and Decision Making
Decision making on internal
affairs.
– Production
– Financial
– Marketing and
– Human resource
Decision making on external
affairs.
– Political
– Economical
– Social
– Technological
– Legal
– Environmental

22. Thank You