Economic
principles assist in rational reasoning and defined thinking. They
develop logical ability and strength of a manager. Some important
principles of managerial economics are:
Marginal and 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.
Marginal analysis implies judging the impact of a unit change in one
variable on the other. Marginal generally refers to small changes.
Marginal revenue is change in total revenue per unit change in output
sold. Marginal cost refers to change in total costs per unit change in
output produced (While incremental cost refers to change in total costs
due to change in total output). 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.
Incremental analysis differs from marginal analysis only in that it
analysis the change in the firm's performance for a given managerial
decision, whereas marginal analysis often is generated by a change in
outputs or inputs. Incremental analysis is generalization of marginal
concept. It refers to changes in cost and revenue due to a policy
change. For example - adding a new business, buying new inputs,
processing products, etc. Change in output due to change in process,
product or investment is considered as incremental change. Incremental
principle states that a decision is profitable if revenue increases more
than costs; if costs reduce more than revenues; if increase in some
revenues is more than decrease in others; and if decrease in some costs
is greater than increase in others.
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