Managerial Economics full important notes tutorials point pdf

Opportunity cost is the value of the best alternative sacrificed when a choice is made.

Example: A firm has machine time that can produce either Product A or Product B. If it uses the machine to produce A, it gives up the profit that could have been earned from B. That forgone profit from B is the opportunity cost of producing A.

Opportunity cost helps in choosing the best alternative use of scarce resources.

Objectives of demand forecasting (any three):

1. Production planning: decide output and capacity utilisation.
2. Inventory planning: maintain optimum stock and reduce carrying cost.
3. Financial planning: estimate cash flows, budgets and working capital needs.

It also helps in pricing, marketing strategy and manpower planning.

Marginal analysis and incremental analysis are key decision tools in managerial economics.

1. Marginal analysis

• Meaning: studies the effect of producing or selling one more unit on costs and revenues.
• Decision rule: in many cases, the firm should expand output until Marginal Revenue (MR) equals Marginal Cost (MC).
• Example: If producing one more unit adds ₹40 to cost (MC=40) but adds ₹50 to revenue (MR=50), it is beneficial to produce that unit. Output is increased until MR falls to equal MC.

2. Incremental analysis

• Meaning: compares additional benefits and additional costs of a decision (not necessarily one unit; it can be a batch or project).
• Decision rule: accept the decision if incremental benefit exceeds incremental cost (incremental profit is positive).
• Example: A special export order for 1,000 units at a lower price can be accepted if extra revenue from the order exceeds extra variable costs and there is spare capacity. Fixed costs already incurred are not relevant if they do not change.

Business uses:

• Pricing and output decisions (MR=MC logic)
• Accept/reject special orders, make-or-buy decisions (incremental profit)
• Product mix decisions and resource allocation

Thus these tools help managers focus on relevant changes rather than total or sunk costs.