This document discusses tools of analysis in managerial economics. It provides examples and explanations of 5 key tools: 1. Opportunity cost, which represents the benefits forgone from pursuing one alternative over another. It helps determine prices, factor payments, and resource allocation. 2. Marginal/incremental analysis, which involves comparing changes in total costs and revenues of decisions. A decision is profitable if it increases revenues more than costs. 3. Discounting principle, which holds that money received in the future is less valuable than money received today due to uncertainty and opportunity cost of investment. 4. Equi-marginal principle, which states resources should be allocated so that marginal productivity gains are equal across uses, maximizing

1. BISHOP STUART UNIVERSITY
MANAGERIAL COURSE WORK
NAME; AMUTUHAIRE RONARD
SIGNATURE………………………….
REG NO; 15/BSU/BEAM/010
LECTURE; KAHANGANE JOFFERY
SUBMISSION DATE…./……/……
Qn. Write short notes giving examples where
necessary on tools of analysis in Managerial
economics.

2. 1.Opportunity cost
Both micro and macro economics make abundant use of the
fundamental concept of opportunity cost. In everyday life, we apply
the notion of opportunity cost even if we are unable to articulate its
significance. In Managerial Economics, the opportunity cost concept is
useful in decision involving a choice between different alternative
courses of action.
Resources are scarce, we cannot produce all the commodities.For the
production of one commodity, we have to forego the production of
another commodity. We cannot have everythingwe want. We are,
therefore,forced to make a choice.
Opportunity cost of a decision is the sacrifice of alternatives required
by that decision. Sacrifice of alternatives is involved when carrying out
a decision requires using a resource that is limited in supply with the
firm. Opportunity cost, therefore, represents the benefits or revenue
forgone by pursuing one course of action rather than another.
The concept of opportunity cost implies three things:
1. The calculation of opportunity cost involves the measurement of
sacrifices.
2. Sacrifices may be monetary or real.
3. The opportunity cost is termed as the cost of sacrificed alternatives.

3. Opportunity cost is just a notional idea which does not appear in the
books of account of the company. If resource has no alternative use,
then its opportunity cost is nil.
In managerial decision making, the concept of opportunity cost
occupies an important place. The economicsignificance of opportunity
cost is as follows:
1. It helps in determining relative prices of different goods.
2. It helps in determining normal remuneration to a factor of
production.
3. It helps in proper allocation of factor resources.
2. Marginal analysis or Incremental Principle:
The incremental concept is probably the most important concept in
economics and is certainly the most frequently used in Managerial
Economics. Incremental concept is closely related to the marginal cost
and marginal revenues of economictheory.
The two major concepts in this analysis are incremental cost and
incremental revenue. Incremental cost denotes change in total cost,
whereas incremental revenue means change in total revenue resulting
from a decision of the firm.

4. The incremental principle may be stated as follows:
A decision is clearly a profitable one if
(i) It increases revenue more than costs.
(ii) It decreases some cost to a greater extent than it increases others.
(iii) It increases some revenues more than it decreases others.
(iv) It reduces costs more than revenues.
Example
Some businessmen hold the view that to make an overall profit, they
must make a profit on every job. The result is that they refuse orders
that do not cover full costs plus a provision of profit. This will lead to
rejection of an order which prevents short run profit. A simple
problem will illustrate this point. Suppose a new order is estimated to
bring in additional revenue of Rs. 10,000. The costs are estimated as
under:
Labor Rs. 3,000
Materials Rs. 4,000
Overhead charges Rs. 3,600
Selling and administrative expenses Rs. 1,400
Full Cost Rs.12, 000

5. The order appears to be unprofitable. For it results in a loss of Rs.
2,000. However, suppose there is idle capacity which can be utilisedto
execute this order. If order adds only Rs. 1,000 to overhead charges,
and Rs. 2000 by way of labour cost because some of the idle workers
already on the pay roll will be deployed without added pay and no
extra sellingand administrative costs, then the actual incremental cost
is as follows:
Labour Rs. 2,000
Materials’ Rs. 4,000
Overhead charges Rs. 1,000
Total Incremental Cost Rs. 7,000
Thus there is a profit of Rs. 3,000. The order can be accepted on the
basis of incremental reasoning. Incremental reasoning does not mean
that the firm should accept all orders at prices which cover merely
their incremental costs.
The concept is mainly used by the progressive concerns. Even though
it is a widely followedconcept, it has certain limitations:
(a) The concept cannot be generalized because observed behavior of
the firm is always variable.
(b) The concept can be applied only when there is excess capacity in
the concern.
3. Principle of Time Perspective:

6. That a bird in hand is worth two in the bush. Anybody will prefer Rs.
100 today to Rs. 100 next year.
There are two main reasons for this:
(1) The future is uncertain and it is preferable to get Rs.100 today
rather than a year after;
(2) Even if one is sure to receive Rs. 100 next year, one would do well
to receive Rs. 100 now and invest it for a year and earn a rate of
interest on Rs. 100 for one year.
What is the present worth (PW) of Rs. 100 obtainable after one year?
The relevant formula for finding this out is:
The principle of economics used in the calculations given above is
called the discountingprinciple. It can be explained as “If a decision
affects costs and revenues at future dates, it is necessary to discount
those costs and revenues to obtain the present values of both before a
valid comparison of alternatives can be made”.
4. DiscountingPrinciple (Time value for Money)
It can be explained as “If a decision affects costs and revenues at
future dates, it is necessary to discount those costs and revenues to
obtain the present values of both before a valid comparison of
alternatives can be made”.

7. This principle talks about comparison of the money value between present and future
time.
Eg: suppose 1) 100/- is gifted to a particular person today.
2) 100/- will be given as gift to same particular person after one year.
Normally a person chooses first offer only. Why because “today rupee is having more
worth than tomorrows rupee”
Example 1:
In the business, everybody prefers to do cash sale only rather than the credit
sale and even they are ready to give cash discount for cash sale. The reason is we will
get a rupee today and today’s rupee is more valuable than the tomorrow’s rupee. But In
credit sale we will get rupee tomorrow or in the future time and nobody give the discount
for credit sale.
Example 2:
We commonly see bank and postal departments adverting that they will give 12%
interest for every year on bank deposits what we have invested with them. With this
12% interest for one year, if we want to get 1-lakh rupees after one year, how much we
should deposit at present? This question is answered by discounting principle.
In the future if we want to earn 100000/- how much we should invest at present.
Example in the bank (100/- @ 12% interest rate of one year)

8. 5. Equi-marginal principle (theory of cardinal Utility)
This is one of the widely used concepts in managerial economics. This principle is also
known the principle of maximum satisfaction. According to this principle, an input should
be allocated in such a maimer that the value added by the last unit of input is same in all
uses. In this way. This principle provides a base for maximum exploitation of all the
inputs of a firm so as to maximise the profitability.
The equi-marginal principle can be applied in different areas of management. It is used
in budgeting. The objective is to allocate resources where hey are most productive. It
can be used for eliminating waste in useless activities. It can be applied in any
discussion of budgeting. The management can accept investments with high rates of
return so as to ensure optimum allocation of capital resources. The equi-marginal
principle can also be applied in multiple product pricing. A multi product firm will reach
equilibrium when the marginal revenue obtained from a product is equal to that of
another product or products. The equi-marginal principle may also be applied in
allocating research expenditures.1
This principle suggests that available resources (inputs) should be so allocated between
the alternative options that the marginal productivity gains (MP) from the various
activities are qualized.
In the words of Ferguson, "Law of equi-marginal utility states that to maximise utility,
consumers way allocate their limited incomes among goods and services in such a way
that the marginal utilities per dollar (rupee) of expenditure on the last unit of each good
purchased will be equal"
According to Marshall, "if a person has a thing which he can put to several uses, he will
distribute it among these uses in such a way that it has the same marginal utility in all"
Lipsey is of the view that, "The consumer maximizing his utility wilt so allocate
expenditure between commodities that the utility derived from the last unit of money
spent on each is equal"
Example: students allocating limited available days for existing subjects during
examinations for getting best percentage. 14 days to go for examinations and having 7
subjects. Students may not always allot 2 days for each subject, they may allot more
days for hard subject and less days for easy subject to maintain good percentage
Example:
Equi-marginal principle is applied in the allocation of the resource in the way of
production. Example a farmer is having different four agricultural farms like
1. Paddy

9. 2. Mangoes
3. Sugar cane
4. Corns.
The above four agricultural farms are in the total 80 acres, each farm in the 20 acres, all
together 80 acres. The farmer is having limited 80 employees with him for employing in
the four farms for production. In general, 80 employees are divided and employed for
four farms evenly as each farm will be allotted with 20 employees. However, in reality
there is no need to allot 20 employees for each farm, because mango farm need less
number of employees, whereas paddy farm needs more number of employees.
Sugarcane and corn farms require average number of employees. Like shown below
Farms Labour
employees
Paddy 30
Mangoes 20
Sugarcane 15
Corns 15
Total 80
The above table reveals the allocation of the resources (labour) available with a farmer
according to the production nature and requirement.

10. REFERENCES
1. MANAGERIAL ECONOMICS BY IVAN PNG 1998
2. MANAGERIAL ECONOMICS IN GLOBAL ECONOMY 7TH EDITION BY
DOMINICK SALVATORE
3. MANAGERIAL ECONOMICS: A PROBLEM SOLVING APROACH 5TH EDITION BY LUKE M.
FROEB AND BRIAN MCCANN
4. www.economicsdiscussion.net/manageral-economics/tools