Managerial economics is a branch of economics that focuses on the application of economic principles and analysis to managerial decision-making. It essentially involves the use of economic concepts and tools to aid managers in making more informed and effective decisions within a business or organizational context. The goal of managerial economics is to help managers optimize the allocation of resources, maximize profits, and achieve the organization’s objectives.
Key concepts and areas within managerial economics include:
Demand and Supply Analysis: Managers use the principles of demand and supply to understand customer behavior, determine pricing strategies, and forecast market trends.
Cost Analysis: Managers analyze production costs, including fixed and variable costs, to determine optimal production levels, pricing, and profitability.
Production and Cost Functions: These functions describe the relationship between inputs and outputs in production processes and help managers make decisions related to production levels, cost minimization, and resource allocation.
Market Structures: Understanding different market structures (perfect competition, monopoly, oligopoly, and monopolistic competition) helps managers develop strategies to compete effectively in their industry.
Elasticity: Elasticity measures the responsiveness of demand or supply to changes in price or other factors. Managers use elasticity to set prices and predict how changes in factors will affect their business.
Marginal Analysis: Marginal analysis involves evaluating the impact of incremental changes in decisions, such as production levels or resource allocation, on costs and revenues.
Profit Maximization: Managers aim to maximize profits by considering the relationship between marginal cost and marginal revenue. This helps determine the optimal level of production.
Decision Making under Uncertainty: Managers often face situations with imperfect information. Decision-making tools like decision trees and expected utility theory help managers make choices considering potential risks and rewards.
Risk Management: Managerial economics assists in assessing and managing risks associated with various business decisions, such as investments, product launches, and expansion.
Time Value of Money: This concept helps managers evaluate the value of future cash flows in terms of present value and assists in making investment decisions.
Capital Budgeting: Managers use tools like net present value (NPV), internal rate of return (IRR), and payback period to evaluate investment projects and decide which projects to pursue.
Game Theory: In strategic decision-making, game theory helps managers analyze the interactions and strategies of competitors and collaborators in various scenarios.
Price Discrimination: Managers may use price discrimination strategies to segment markets and charge different prices to different customer groups based on their willingness to pay.
Managerial economics plays a crucial role in aiding managers to make well-informed decisions that balance economic efficiency, profitability, and the overall goals of the organization. It combines economic theory with real-world business scenarios to provide a practical framework for decision-making.
Minimum wages can stand set by statute, the decision of a competent authority, a wage board, a wage council, or by industrial or labor courts or tribunals. Minimum wages can also exist set by giving the force of law to provisions of collective agreements. It commonly accepts that workers should give at least minimum wages to enable them to lead a minimum standard of living. Then a question arises – What is a minimum wage? It is, however, difficult to define “minimum wage’’. However, it may define as a wage that is just sufficient for the worker to keep his body and soul together.
Introduction to Minimum Wages: Meaning, Definition, Arguments, and Objectives.
First, do you know “What does mean the Wages?” Now learn, that the Minimum wage has stood defined as the minimum amount of remuneration; that an employer requires to pay wage earners for the work performed during a given period; which cannot reduce by collective agreement or an individual contract. The purpose of minimum wages is to protect workers against unduly low pay. They help ensure a just and equitable share of the fruits of progress to all; and, a minimum living wage for all who stand employed and in need of such protection.
Definition of Minimum Wages:
They can also be one element of a policy to overcome poverty and reduce inequality, including those between men and women. Minimum wage systems should define and design in a way to supplement and reinforce other social and employment policies, including collective bargaining; which uses to set terms of employment and working conditions.
The committee on fair wages defines the minimum wage as an irreducible (minimum) amount considered necessary for the sustenance of the worker and his family; and, the preservation of his efficiency at work. The Fair Wages Committee considered that “a minimum wage must provide not merely for the bare subsistence of life but the preservation of efficiency of the worker. For this purpose, the minimum wage must also provide for some measure of education, medical requirements and amenities”.
As well as:
Such a minimum wage may fix by an agreement between the employer and the workers but it is generally determined by legislation. The workers generally demand that the minimum wage should base on the standard of living but the employers argue; that it should base on the productivity of labor and the capacity of the industry to pay.
Minimum wages defines as,
“The minimum amount of remuneration that an employer requires to pay wage earners for the work performed during a given period; which cannot reduce by collective agreement or an individual contract.”
But it should note that while fixing the minimum wage, the worker’s family should also take into account. The wage should sufficient not only to maintain himself but also his family in a reasonable standard of living. Then a question arises – What is the size of the worker’s family? It now generally accepts that a worker’s family consists of five-person – the worker and his wife and three children.
Minimum Wages: Definition, Arguments, and Objectives; Image credit by thedailybeast.
The minimum wage must fix in such a way that it is sufficient to provide a reasonable standard of living to the worker and his family. Thus, while fixing the minimum wage, three principles should take into account – the living wage, the fair wage, and the capacity of the industry to pay. While fixing the minimum wage, the capacity of the industry should take into account. If a particular industry is not able to pay the minimum wages to its workers; then it has no right to exist in the business.
Background:
A minimum wage was introduced by the Labour government on 1 April 1999 at a rate of £3.60 per hour for workers over 21 years of age, and £3 per hour for 18–21-year-olds; this was raised by 10p per hour in 2000. At the time, the Low Pay Unit estimated that 2 million people (8.3 percent of the workforce) would gain from this, the main beneficiaries being women, especially in social care (e.g. child care) and cleaning jobs. Other areas where there is traditionally low pay, and which would benefit, were young people (200 000); hospitality (295 000); and retail (300 000).
Arguments for introducing a Minimum wage and also Against:
The following are;
For introducing:
Arguments for introducing a Minimum wage.
For Against:
Arguments against introducing a Minimum wage.
Objectives of Minimum wages:
The objectives of minimum wages are as follows:
To prevent the sweating of workers in organizing or unorganized industries.
Prevent the exploitation of workers and enable them to obtain wages according to their productive capacity, and.
Maintain industrial peace.
In organized industries where the trade unions are powerful; the employers generally yield to the demands of the workers for fixing a proper wage. But in the unorganized industries where the trade unions are not found, government interference and legislation become essential to ensure that the laborers do not exploit and pay at least the minimum wage.
Welfare Economics is a normative branch of economics that is concerned with the way economic activity ought to be arranged so as to maximize economic welfare. The hallmark of welfare economics is that policies are assessed exclusively in terms of their effects on the well-being of individuals. Welfare economics has been defined by Scitovsky as “That part of the general body of economic theory which is concerned primarily with policy.”So, what is the question of the topic we are going to discuss; What does Welfare Economics mean? Measuring and Value decisions!
Explain about Welfare Economics mean, Measuring Welfare, and their Value decisions!
Accordingly, whatever is relevant to individuals well-being is relevant under welfare economics, and whatever is unrelated to individuals well-being is excluded from consideration under welfare economics. Economists often use the term utility to refer to the well-being of an individual, and, when there is uncertainty about outcomes, economists use an ex-ante measurement of well-being, so-called expected utility.
Welfare economics employs value judgment s about what ought to be produced, how production should be organized, the way income and wealth ought to be distributed, both now and in the future. Unfortunately, each individual in a community has a unique set of value judgments, which are dependent upon his or her attitudes, religion, philosophy and politics, and the economist has difficulty in aggregating these value judgments in advising policymakers about decisions that affect the allocation of resources (which involves making interpersonal comparisons of utility).
Definition of Welfare Economics:
The branch of economics called welfare economics is an outgrowth of the fundamental debate that can be traced back to Adam Smith, if not before. It is the economic theory of measuring and promoting social welfare.
In The Wealth of Nations, Book IV, Smith wrote:
“Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally indeed neither intends to promote the public interest nor knows how much he is promoting it…. He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
J. De V. Graff,
“The proof of the pudding is indeed in the eating. The welfare cake, on the other hand, is so hard to taste, that we must sample its ingredients before baking.”
R.W. Emerson, Work and Days,
“The greatest meliorator of the world is selfish, huckstering trade.”
The literature on welfare economics has grown rapidly in recent years. The utilitarians were the first to talk of welfare in terms of the formula, ‘the greatest happiness of the greatest number’. Vilfredo Pareto considered the question of maximizing social welfare on the basis of general optimum conditions.
Marshall and Pigou, the neo-classical economists, concentrated on particular sectors of the economic system in their postulates of welfare economics. It was Professor Robbins’ ethical neutrality view about economics that led to the development of welfare economics as an important field of economic studies. Kaldor, Hicks, and Scitovsky have laid the foundations of the New Welfare Economics with the help of the ‘compensation principle’ avoiding all value judgments.
On the other hand, Bergson, Samuelson, and others have developed the concept of the Social Welfare Function without sacrificing value judgments. In the discussion that follows we shall refer to certain basic concepts of welfare economics and then pass on to Pareto’s welfare conditions for an understanding of modern welfare economics.
Explanation of Welfare Economics:
Economists have tried for many years to develop criteria for judging economic efficiency to use as a guide in evaluating actual resource deployments. The classical economists treated utility as if it was a measurable scale of consumer satisfaction, and the early welfare economists, such as Pigou, continued in this vein so that they were able to talk in terms of changes in the pattern of economic activity either increasing or decreasing economic welfare.
However, once economists rejected the idea that utility was measurable, then they had to accept that economic welfare is immeasurable and that any statement about welfare is a value judgment influenced by the preferences and priorities of those making the judgment. This led to a search for welfare criteria, which avoided making interpersonal comparisons of utility by introducing explicit value judgments as to whether or not welfare has increased.
The simplest criterion was developed by Vilfredo Pareto, who argued that any reallocation of resources involving a change in goods produced and/or their distribution amongst consumers could be considered an improvement if it made some people better off (in their own estimation) without making anyone else worse off. This analysis led to the development of the conditions for Pareto Optimality, which would maximize the economic welfare of the community, for a given distribution of income.
Pareto optimality is thus a dominance concept based on comparisons of vectors of utilities. It rejects the notion that utilities of different individuals can be compared, or that utilities of different individuals can be summed up and two alternative situations compared by looking at summed utilities. When ultimate consumers do not appear in the model, as in the pure production framework, a situation is said to be Pareto optimal if there is no alternative that results in the production of more of some output, or the use of less of some input, all else equal.
Obviously saying that a situation is Pareto optimal is not the same as saying it maximizes GNP, or that it is best in some unique sense. The Pareto criterion avoids making interpersonal comparisons by dealing only with uncontroversial cases where no one is harmed. However, this makes the criterion inapplicable to the majority of policy proposals that benefit some and harm others, without compensation. There are generally many Pareto optimal.
However, optimality is a common good concept that can get common assent: No one would argue that society should settle for a situation that is not optimal because if A is not optimal, there exists a B that all prefer. Nicholas Kaldor and John Hicks suggested an alternative criterion (the compensation principle), proposing that any economic change or reorganization should be considered beneficial if, after the change, gainers could hypothetically compensate the losers and still be better off.
In effect, this criterion subdivides the effects of any change into two parts:
Efficiency gains/losses, and.
Income‐distribution consequences.
As long as the gainers evaluate their gains at a higher figure than the value that losers set upon their losses, then this efficiency gain justifies the change, even though (in the absence of actual compensation payments) income redistribution has occurred. Where the gainers from a change fully compensate the losers and still show a net gain, this would rate as an improvement under the Pareto criterion.
Where compensation is not paid, then a second-best situation may be created where the economy departs from the optimum pattern of resource allocation, leaving the government to decide whether it wishes to intervene to tax gainers and compensate losers. In addition to developing welfare criteria, economists such as Paul Samuelson have attempted to construct a social welfare function that can offer guidance as to whether one economic configuration is better or worse than another.
The social‐welfare function can be regarded as a function of the welfare of each consumer. However, in order to construct a social‐welfare function, it is necessary to take the preferences of each consumer and aggregate them into a community preference ordering, and some economists, such as Kenneth Arrow, have questioned whether consistent and noncontradictory community orderings are possible.
Despite its methodological intricacies, welfare economics is increasingly needed to judge economic changes, in particular, rising problems of environmental pollution that adversely affect some people while benefiting others. Widespread adoption of the ‘polluter pays’ principle reflects a willingness of governments to make interpersonal comparisons of utility and to intervene in markets to force polluters to bear the costs of any pollution that they cause.
How to Measuring Welfare?
There are mainly two concepts for measuring welfare. The first relates to a Pareto improvement whereby social welfare increases when society as a whole is better off without making any individual worse off. This proposition also includes the case that when one or more persons are better off, some persons may be neither better off nor worse off. It is, thus, free from making interpersonal comparisons.
Hicks, Kaldor and Scitovsky have explained social welfare in the Paretian sense in terms of ‘the compensation principle’. In the second place, social welfare is increased, when the distribution of welfare is better in some sense. It makes some persons in society better off than others so that the distribution of welfare is more equitable. Also study, Why Entrepreneurs Required the Capital? to Pursue Business!
This is known as distributional improvement and relates to the Bergson social welfare function. Dr. Graaf, however, refers to another concept which he calls the paternalist concept. A state or a paternalist authority maximizes social welfare according to its own notion of welfare without any regard to the views of individuals in society.
Economists do not make use of this concept to measure social welfare because it is related to a dictatorial regime and does not fit in a democratic set-up. Economic welfare, thus, implies social welfare which is concerned primarily with the policy that leads either to a Pareto improvement or distributional improvement, or both.
What does Welfare Economics mean? Measuring and Value decisions! Image credit from #Pixabay.
Value Decisions in Welfare Economics:
The following Value Judgments or Decisions below are:
Alt ethical judgments and statements which perform recommendatory, influential and persuasive functions are value judgments. According to Dr. Brandt a judgment is a value judgment if it entails or contradicts some judgment which could be formulated so as to involve any one of the following terms in an In ordinary sense: “Is a good thing that” or “Is a better thing that”, “Is normally obligatory”, “Is reprehensible”, and “Is normally praiseworthy”.
Value judgments describe facts in an emotive way and tend to influence people by altering their beliefs or attitudes. Such statements as “This change will increase economic welfare”, “Rapid economic development is desirable”, “Inequalities of incomes need be reduced”, are all value judgments. Welfare is an ethical term. So all welfare propositions are also ethical and involve value judgments.
Such terms as “Satisfaction”, “Utility” are also ethical in nature since they are emotive. Similarly, the use of a highly emotive word as “social”, “community” or “national” in place of “economic” is ethical. Since welfare economics is concerned with policy measures, it involves ethical terminology, such as the increase of “social welfare” or “social advantage” or “social benefit”. Thus welfare economics and ethics cannot be separated.
They are inseparable, according to Prof. Little, “because the welfare terminology is a vague terminology. Since welfare propositions involve value judgments, the question arises whether economists should make value judgments in economics.” Economists differ over this issue. The neo-classical were concerned with the measurability of utility and the inevitable interpersonal comparisons of utility.
Pigou’s income-distribution policy, based on Marshall’ postulate of equal capacity for satisfaction, implied that interpersonal comparisons of utility were possible. Robbins, in 1932, led a frontal attack against this view. He maintained that if economics was to be an objective and scientific study, economists should refrain from making interpersonal comparisons, for policy recommendations tend to make some people better off and others worse off.
It is, therefore, not possible to make interpersonal comparisons, i.e. the welfare of one person cannot be compared with that of another. The majority of economists agreeing with Robbins switched over to the Paretian ordinal method in order to avoid interpersonal comparisons of utility. Kaldor, Hicks, and Scitovsky formulated the ‘compensation principle’ free from value judgments.
Accordingly, economists can make policy recommendations on the basis of efficiency considerations. The objective test of economic efficiency is that the gainers from a change can more than compensate the losers. But this test of increased efficiency implies a value judgment because the gainers from a change are able to compensate the losers.
The very idea of compensation involves value prescriptions. So even the formulators of the ‘New Welfare Economics’ have not been successful in building value-free welfare economics. Prof. Bergson also agrees with Robbins that interpersonal comparisons involve value judgments. But he along with Samuelson and Arrow holds that no meaningful propositions can be made in welfare economics without introducing value judgments.
Welfare economics, thus, becomes a normative study which, however, does not prevent economists from studying it scientifically. Even the Paretian general optimum theory is not value-free. It states that an optimum position is one from which it is not possible to make everyone better off without making at least one person worse off, even by reallocation of resources. This welfare proposition contains certain value judgments.
The Paretian optimum is related to the welfare of the individual. In order to attain the optimum position every individual act as the best judge of his welfare. If any re-allocation of resources makes at least one person better off without making others worse off, then the welfare of the society is said to have increased. These are all value judgments which Pareto could not avoid despite the fact that he used the method of ordinal measurement of utility.
Boulding’s view merits consideration in this controversy:
“Whatever may be the case in the Elysian Fields of pure economics, the social fact is that we make… interpersonal comparisons all the time, and that hardly any social policy is possible without them, for almost every social policy makes some people worse-off and some better-off. The Paretian optimum itself is a special case of a social welfare function, for if we assume this to be a social ideal it implies that nobody should ever be made worse-off, whereas most societies have defined certain groups (e.g., criminals or foreigners) who should be made worse off…”
What is Opportunity Cost? Opportunity cost analysis is an important part of a company’s decision-making processes; but, does not treat as an actual cost in any financial statement. Opportunity cost is The profit lost when one alternative selecting over another. The concept is useful simply as a reminder to examine all reasonable alternatives before making a decision. So, what discusses is – Understand the Essay on Opportunity Cost in Managerial Economics.
The Concept of Opportunity Cost is to explain the Meaning, Definition, Principles, Advantages, and Disadvantages.
While the term opportunity cost has its roots in economics, it’s also a very important concept in the investment world. It’s a model that can apply to our everyday decisions, as we face choosing between the many options we encounter each day. For example, you have $1,000,000 and choose to invest it in a product line that will generate a return of 5%. If you could have spent the money on a different investment that would have to generate a return of 7%, then the 2% difference between the two alternatives is the foregone opportunity cost of this decision.
Meaning of Opportunity Cost:
Opportunity cost cannot always fully quantify at the time when a decision-maker. Instead, the person making the decision can only roughly estimate the outcomes of various alternatives; which means imperfect knowledge can lead to an opportunity cost that will only become obvious in retrospect. This is a particular concern when there is a high variability of return. The concept of opportunity cost does not always work since it can be too difficult to make a quantitative comparison of two alternatives. It works best when there is a common unit of measure, such as money spent or time used. Opportunity cost is not an accounting concept; and so does not appear in the financial records of an entity.
It is strictly a financial analysis concept [Hindi]. Opportunity costs represent the benefits an individual, investor, or business misses out on when choosing one alternative over another. While financial reports do not show opportunity cost; business owners can use it to make educated decisions when they have multiple options before them. Because of they unsee by definition, opportunity costs can overlook if one is not careful. By understanding the potential missed opportunities one forgoes by choosing one investment over another, better decisions can make.
Definition of Opportunity Cost:
Opportunity Cost refers to the expecting returns from the second-best alternative use of resources that are foregone due to the scarcity of resources such as land, labor, capital, etc. In other words, the opportunity cost is the opportunity lost due to limited resources. It is a very powerful concept when someone has to decide to select a particular product or making a choice.
In simple words, opportunity cost means choosing or making the best decision from a different option. When one has to decide between various actions to select only one particular work at a time calls opportunity cost.
When faced with a decision, the opportunity cost the value assigned to the next best choice. The value or opportunity not chosen by the decision-maker could take many forms, including assets (as a car or home), resources (as land), or even benefits. When companies make decisions to purchase one asset over another; they’re passing up the opportunity cost offered by the asset not chosen.
The Principles of Opportunity Cost:
The opportunity cost of a decision means the sacrifice of alternatives required by that decision. The concept of opportunity cost can best understand with the help of a few illustrations, which are as follows:
The funds employed in one’s own business is equal to the interest that could earn on those funds if the employee in other ventures.
The time as an entrepreneur devotes to his own business is equal to the salary he could earn by seeking employment.
Using a machine to produce one product is equal to the earnings forgone which would have been possible from other products.
Using a machine that is useless for any other purpose is zero since its use requires no sacrifice of other opportunities.
If a machine can produce either X or Y; the opportunity cost of producing a given quantity of X is equal to the quantity of Y; which it would have to produce. If that machine can produce 10 units of X or 20 units of Y; the opportunity cost of 1 X is equal to 2 Y.
The opportunity cost of if no information provides about quantities produced; except about their prices then the opportunity cost can compute in terms of the ratio of their respective prices, say Px/Py.
Holding 100 Dollars as cash in hand for one year is equal to the 10% rate of interest; which would have been earning had the money been keeping as the fixed deposit in a bank. Thus, it is clear that opportunity costs require the ascertaining of sacrifices. If a decision involves no sacrifice; its opportunity cost is nil.
For decision-making,
Opportunity costs are the only relevant costs. The opportunity cost principle may state as under: “The cost involved in any decision consists of the sacrifices of alternatives required by that decision. If there are no sacrifices, there is no cost.” Thus in the macro sense, the opportunity cost of more guns in an economy is less butter. That is the expenditure on the national fund for buying armor has cost the nation of losing an opportunity of buying more butter. Similarly, a continued diversion of funds towards defense spending amounts to a heavy tax on alternative spending required for growth and development.
Advantages of Opportunity Cost:
The main advantages of opportunity cost are:
Awareness of Lost Opportunity:
The main benefit of opportunity costs is that it causes you to consider the reality that when selecting among options; you give up something in the option not selected. If you go to a grocery store looking for meat and cheese; but only have enough money for one, you have to consider the opportunity cost of the item you decide not to buy. Recognizing this helps you make more informed and economically sensible decisions that maximize your resources.
Relative Price:
Another important benefit of considering your opportunity cost is it allows you to compare relative prices and the benefits of each alternative. Compare the total value of each option and decide which one offers the best value for your money. For instance, a business with an equipment budget of $100,000 may buy 10 pieces of Equipment A at $10,000 or 20 pieces of Equipment B at $5,000. You could buy some of A and some of B; but relative pricing would mean comparing the value to you of 10 pieces of A versus 20 pieces of B. Assuming you choose 20 pieces of B, you effectively decide this is more valuable to you than 10 pieces of A.
Disadvantages of Opportunity Cost:
The disadvantages of opportunity cost are:
Time:
Opportunity costs take time to calculate and consider. You can make a more informed decision by considering opportunity costs; but, managers sometimes have limited time to compare options and make a business decision. In the same way, consumers going to the grocery store with a list and analyzing the potential opportunity costs of every item is exhaustive. Sometimes, you have to make an instinctive decision and evaluate its results later.
Lack of Accounting:
Though useful in decision making, the biggest drawback of opportunity cost is that it not account for my company accounts. Opportunity costs often relate to future events, which makes it very hard to quantify. This is especially true when the opportunity cost is of non-monetary benefit. Companies should consider evaluating projected results for forgone opportunities against actual results for selected options. This is not to generate bad feelings, but to learn how to choose a better opportunity the next time.
The concept of Opportunity Cost:
The concept of opportunity cost occupies a very important place in modern economic analysis. The opportunity costs or alternative costs are the return from the second-best use of the firm’s resources which the firm forgoes to avail itself of the return from the best use of the resources. To take an example, a farmer who is producing wheat can also produce potatoes with the same factors. Therefore, the opportunity cost of a quintal of wheat is the amount of the output of potatoes gives up.
Thus we find that the opportunity cost of anything is the next best alternative that could produce instead of the same factors or by an equivalent group of factors, costing the same amount of money. Two points must note in this definition. Firstly, the opportunity cost of anything is only the next best alternative foregone. Secondly, in the above definition is the addition of the qualification or by an equivalent group of factors costing the same amount of money.
The alternative or opportunity cost of a good can give a monetary value. To produce a good, the producer has to employ various factors of production and have to pay them sufficient prices to get their services. These factors have alternative uses. The factor must pay at least the price they can obtain in the alternative uses.
Examples of Opportunity Cost:
Examples are better to understand Opportunity Cost:
Suppose a businessman can buy either a washing machine or a press machine with his limited resources; and, suppose that he can earn annually $ 40,000 and 60,000 respectively from the two alternatives. A rational businessman will certainly buy a press machine that gives him a higher return. But, in the process of earning $ 60,000 he has foregone the opportunity to earn $ 40,000 annually from the washing machine. Thus, $ 40,000 is his opportunity cost or alternative cost. The difference between actual and opportunity costs call economic rent or economic profit. For example, the economic profit from the press machine in the above case is $ 60,000 –$ 4000 = $ 20,000. So long as economic profit is above zero, it is rational to invest resources in the press machine.
A company has $2 million to spend on a project. The company can decide to invest the money for advertising purposes of the particular product at the time of launch in the market. If they decide to invest the money in production and to buy machinery; and, all then the opportunity cost gets lost for advertisement purposes. And if they decide to spend the money on advertisement purposes; then the opportunity cost will be the organization’s ability to produce the commodity more efficiently.
Another example of,
A business organization is that an organization owns a building in which it operates its function; and so, it does not have to pay any rent for the office room space and all. But from the economist point of view, the business owner might have kept the office space for current use itself or the office space might have given for rent for money. So, that the owner could have earned from the rent but if the owner will not consider or provide the office space for rent then there is a loss in business expenses according to economist viewpoint. But in real life accountant of a business organization cannot provide any loss expenses due to opportunity cost in any accounts.
Even though the opportunity cost not consider by the accountants in case of financial accounts and all. But it is very much important for a manager of the business organization to consider opportunity costs about business strategies. A business manager must consider opportunity costs in calculating the opportunity expenses in the organization for analyzing the profitable deals available in the market. It also helps in utilizing limited resources efficiently.
Essay on Opportunity Cost in Managerial Economics. Image credit from #Pixabay.
