Financial and Managerial Accounting are two out of the four largest accounting areas. Financial accounting is the process a company goes through to prepare its financial statements to excuse its financial turn to the people in the aerate of an invested union such as stockholders, suppliers, creditors, and investors. Managerial accounting is the process a company works through to make its financial reports suitably so that internal stakeholders in imitation of managers can make financial and functional decisions for the company. While there are some similarities together with the two types of accounting, the differences are shown in contracts, benchmarks, and audience.
Here are the articles to explain, Similarities and Differences between Financial and Managerial Accounting!
Managerial and financial accounting have several parallels. Both types fabricate financial reports, are centered as regards finances, are meant for a specific audience, and require a big knowledge of accounting practices. They both use an accounting system that accumulates and classifies the financial hint for the formation of the accounting statements. Revenues, expenses, assets, liabilities, and cash flow are single ones tracked by both managerial and financial accountants. Both accounting systems stand used to determine and sham costs for alternating accounting periods.
Similarities and Differences Part 01;
Financial and managerial accounting have a few similarities but the differences are many. One main difference is the audience. Managerial or cost accounting reports are prepared for internal stakeholders. Employees within the company such as managers and directors use the reports to make decisions for the company. They can use it to determine how much maintenance they can spend and go about for what. Should they invest in choice equipment or employ more employees? Do they depend to sell some trucks in their fleet or obsession to agree to some employees to go? All of this spread helps the managers realize the company’s goals.
Financial accountants must follow the Generally Accepted Accounting Principles (GAAP) previously preparing their reports. Financial accounting reports stand meant for owners, lenders, investors, and stockholders. The financial accounting reports agree to the outside stakeholders to determine how adroitly or how bad the company may ham it taking place in the make remote away along. The reports should as well as come in the works taking into account the child maintenance for potential investors and creditors to ample permit knowledge to make financial decisions just about the company.
Similarities and Differences Part 02;
Another difference in financial and managerial accounting is the regulations each adheres to. As avowed above, financial accounting must follow GAAP. This is a set of accounting guidelines that require consistent financial reporting and recording. The financial accounting reports are a summary of how the company is the theater arts overall. Managerial accounting exists not required to follow GAAP. GAAP can take doings closely managerial accounting reports. GAAP requires that expenses following rent and utilities stand included in overhead costs. However, from a managerial standpoint, they may be keener on administrative costs to pro happening to create internal decisions.
The reports each type of accounting produces and uses are alternating as dexterously. Managerial accounting relies on budget reports. Budgeting helps managers take into consideration overspending. Budget reports consent managers following a lead to bitter costs, negotiating considering vendors, and possibly offering incentives. Managers as well as user account receivable reports, material, and labor cost reports, and accomplish reports to create enlarged decisions on speaking company operations and spending.
Similarities and Differences Part 03;
Financial accountants put together four types of financial statements for uncovered stakeholders. The description sheet archives the company’s assets, liabilities, and equity. It details the revenue and expenses for an unmodified time. The pension avowal archives a company’s profits and losses from both working and non-energetic actions plus for an appreciative time. The avowal of cash flows shows how a company’s cash comes in and out of a matter. It reports behind reference to where the cash came from and where the cash went. The undertaking description financial accounting produces is the declaration of owners equity. The avowal of owners equity reports which actions increased or decreased the equity section from the tab sheet. Financial accounting gives more of an overall characterize even if managerial accounting gives a detailed summary of by-products or regions.
Similarities and Differences Part 04;
Other differences between the two types of accounting are neighboring legitimate requirements, timing, and confidentiality. Financial accounting reports stand required to file by the conflict at the decrease of each accounting time. The flavor contained in the reports and statements exists not kept confidential sustain outside stakeholders use the reports to create decisions amalgamated to whether or not to invest in the company or lend keep to them. Managerial reports exist kept confidential because they contain twinge sponsorship about products and costs. There are no legitimate requirements for managerial accounting statements. Managers can demand these statements at any become early and to the fore any frequency, they run necessary.
While there are similarities and differences, both financial and managerial accounting statements are important for businesses to gauge their profits and expenses. Both types are crucial for their meant audiences and stand used to make important decisions. Each accounting type has value to the companies they put in upon.
Similarities and Differences between Financial and Managerial Accounting; Image by Oliver Putz from Pixabay.
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.
The primary difference between Traditional Economicsand Managerial Economics; First, the Traditional economy is an original economic system in which traditions, customs, and beliefs help shape the goods and services the economy produces and the rules and manner of their distribution. Countries that use this type of economic system are often rural and farm-based. The concept of the study explains – What is traditional economics? Meaning, and What is Managerial economics? and their difference.
Understanding and Learn, Explain the Difference between Traditional Economics and Managerial Economics!
Also known as a subsistence economy, a traditional economy defines by bartering and trading. A Little surplus produces, and if any excess goods are made, they are typically given to a ruling authority or landowner.
After, Managerial economics is the “application of the economic concepts and economic analysis to the problems of formulating rational managerial decisions”. It sometimes refers to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units.
What is traditional economics? Meaning.
Traditional economics refers to the more primitive principles of modern economics, which are commonly using in undeveloped countries, who have not yet embraced technical and globalization changes in the study of economics over the years. Traditional economics relies on the use of old cultures, trends, and customs in allocating rare resources to gain profit.
A traditional economy will definitely rely on the traditions of heritage and how the previous generations have made their production activities, which will create the basis for the production of goods. The main production activities in the traditional economy include farming, livestock activities, and hunting. In countries with such traditional economic systems, Papua New Guinea, South America, parts of Africa, and the rural areas of Asia are including.
Managerial economics refers to the branch of economics, which derives from the subject matter of microeconomics, which considers houses and firms in the economy, and macroeconomics related to employment rates, interest rates, inflation rates, and other macroeconomic variables from the country are related to the complete completion.
Managerial economics uses mathematics, statistics, management theory, economic data, and modeling techniques to help business managers manage their operations with maximum efficiency. They help managers make the right decisions in the allocation of rare resources such as land, labor, capital to achieve high profitability while reducing costs. Managerial economics helps managers decide which products to produce, how much to produce, what prices will determine, and what channels to use in sales and distribution.
What is the Difference between Traditional Economics and Managerial Economics?
The upcoming discussion will help you to differentiate between traditional and managerial economics.
The difference in Traditional Economics:
Traditional Economics has both Micro and Macro aspects.
This is both positive (existing certain) and Normative Science.
This deals with Theoretical aspects only.
Here, problems are analyzing both from a Micro and Macro point of view.
It studies human behavior based on certain assumptions, but these assumptions do not hold good in Managerial Economics.
Here, we study only the economic aspects of the problems.
Here, we study principles underlying rent, wages, interest, and profits.
Traditional Economics scope is wide and it covers various areas.
Here, the efficiency of the firm is not studying.
The difference in Managerial Economics:
It is essentially Micro in character.
This is essentially Normative (setting standard) in nature.
While it deals with Practical aspects.
It studies the activities of an individual firm or unit.
Managerial economics deals mainly with Practical problems.
Here, both economic and non-economic aspects of the problems are studying.
Here, we study mainly the principles of profit only.
While the scope of Managerial Economics is limited and its scope is not so wide as that of Traditional Economics.
Here, the most important task is to study how to improve the efficiency of the firm.
Another Main difference between Traditional and Managerial in without table:
Managerial Economics has been describing as economics apply to decision-making. It may view as a special branch of Economics. However, the main points of differences are the following:
Traditional Economics has both micro and macro aspects whereas Managerial Economics is essentially micro in character.
Economics is both positive and normative science but Managerial Economics is essentially normative in nature.
Economics deals mainly with the theoretical aspect only whereas Managerial Economics deals with the practical aspect.
Managerial Economics studies the activities of an individual firm or unit. Its analysis of problems is micro in nature, whereas Economics analyzes problems both from the micro and macro point of view.
Economics studies human behavior based on certain assumptions. But, these assumptions sometimes do not hold good in Managerial Economics as it concerns mainly with practical problems.
Under Economics we study only the economic aspect of the problems but under Managerial Economics we have to study. Both the economic and non-economic aspects of the problems.
Economics studies principles underlying rent, wages, interest, and profits. But in Managerial Economics we study mainly the principles of profit only.
Sound decision-making in Managerial Economics is considering to be the most important task for the improvement of the efficiency of the business firm. But in Economics it is not so.
The scope of Managerial Economics is limited and not so wide as that of Economics.
Thus, it is obvious that Managerial Economics is very closely related to Economics. But, its scope is narrow as compared to Economics.
Managerial Economics is also closely related to other subjects, viz., Statistics, Mathematics, and Accounting.
A trained managerial economist integrates concepts and methods from all these disciplines bringing them to bear on the business problems of a firm.
What is the difference between economics and managerial economics? Some Explanation.
Both managerial economics and traditional economics include production, distribution, and consumption of goods and services, and are reflecting on the basic economic theory of using. The factors of production effectively for the production of both goods and services.
The main difference between the branches of economics is that traditional economics is ancient. And, its development is done in undeveloped and less technologically advanced economies. While the result of managerial economics globalization and the development of economics involves making managerial decisions.
Managerial economics uses sophisticated modeling systems and statistical data to make decisions regarding quantity, pricing and distribution channels, whereas, in traditional economics, the use of farming, hunting, and livestock activities uses by individuals to meet their daily consumption requirements. Includes.
Difference between Traditional and Managerial Economics, Image Credit to ilearnlot.com.
Managerial Economics can define as the amalgamation of economic theory with business practices to ease decision-making and future planning by management. The Concept of Managerial Economics Study: Meaning, Definition, Nature of Managerial Economics, Scope of Managerial Economics, and Principles of Managerial Economics. Managerial Economics assists the managers of a firm in a rational solution to obstacles faced in the firm’s activities. It makes use of economic theory and concepts. It helps in formulating logical managerial decisions.
Learn, Explain Managerial Economics: Nature, Scope, and Principles.
The key to Managerial Economics is the microeconomic theory of the firm. It lessens the gap between economics in theory and economics in practice. Managerial Economics is a science dealing with the effective use of scarce resources. It guides the managers in taking decisions relating to the firm’s customers, competitors, suppliers as well as relating to the internal functioning of a firm. It makes use of statistical and analytical tools to assess economic theories in solving practical business problems.
Study of Managerial Economics:
They help in the enhancement of analytical skills, assists in rational configuration as well as a solution to problems. While microeconomics is the study of decisions made regarding the allocation of resources and prices of goods and services, macroeconomics is the field of economics that studies the behavior of the economy as a whole. Managerial Economics applies microeconomic tools to make business decisions. It deals with a firm.
The use of Managerial Economics not limits to profit-making firms and organizations. But it can also use to help in the decision-making process of non-profit organizations (hospitals, educational institutions, etc). It enables optimum utilization of scarce resources in such organizations as well as helps in achieving the goals in the most efficient manner. Managerial Economics is of great help in price analysis, production analysis, capital budgeting, risk analysis, and determination of demand. Managerial economics uses both economic theories as well as Econometrics for rational managerial decision making.
Econometrics defines:
As the use of statistical tools for assessing economic theories by empirically measuring the relationship between economic variables. It uses factual data for the solution of economic problems. Managerial Economics associates with the economic theory which constitutes “Theory of Firm”. The theory of the firm states that the primary aim of the firm is to maximize wealth. Decision making in managerial economics generally involves the establishment of a firm’s objectives, identification of problems involving in the achievement of those objectives, development of various alternative solutions, selection of best alternative, and finally implementation of the decision.
Nature of Managerial Economics:
Managers study managerial economics because it gives them insight to reign the functioning of the organization. If the manager uses the principles applicable to economic behavior in a reasonably, then it will result in the smooth functioning of the organization.
Managerial Economics is a Science:
Managerial Economics is an essential scholastic field. It can compare to science in the sense that it fulfills the criteria of being a science in the following sense:
Science is a Systematic body of Knowledge. It bases on methodical observation. Managerial economics is also a science of making decisions about scarce resources with alternative applications. It is a body of knowledge that determines or observes the internal and external environment for decision making.
In science, any conclusion arrives at after continuous experimentation. In Managerial economics also policies are made after persistent testing and training. Though the economic environment consists of the human variable, which is unpredictable, thus the policies made are not rigid. A managerial economist takes decisions by utilizing his valuable experience and observations.
Science principles are universally applicable. Similarly, policies of Managerial economics are also universally applicable partially if not fully. The policies need to change from time to time depending on the situation and attitude of individuals to those particular situations. Policies are applicable universally but modifications are requiring periodically.
Managerial Economics requires Art:
The managerial economist requires to have an art of utilizing his capability, knowledge, and understanding to achieve the organizational objective. The managerial economist should have art to put in practice his theoretical knowledge regarding elements of the economic environment.
Managerial Economics for the administration of the organization:
Managerial economics helps the management in decision making. These decisions are based on the economic rationale and are valid in the existing economic environment.
Managerial economics is helpful in optimum resource allocation:
The resources are scarce with alternative uses. Managers need to use these limited resources optimally. Each resource has several uses. It is the manager who decides with his knowledge of economics that which one is the preeminent use of the resource.
Managerial Economics has components of microeconomics:
Managers study and manage the internal environment of the organization and work for the profitable and long-term functioning of the organization. This aspect refers to the microeconomics study. The managerial economics deals with the problems faced by the individual organization such as the main objective of the organization, demand for its product, price and output determination of the organization, available substitute and complementary goods, the supply of inputs and raw material, target or prospective consumers of its products, etc.
Managerial Economics has components of macroeconomics:
None of the organizations works in isolation. They affecting by the external environment of the economy in which it operates such as government policies, general price level, income and employment levels in the economy, stage of the business cycle in which economy is operating, exchange rate, the balance of payment, general expenditure, saving and investment patterns of the consumers, market conditions, etc. These aspects are related to macroeconomics.
Managerial Economics is dynamic:
Managerial Economics deals with human-beings (i.e. human resources, consumers, producers, etc.). Nature and attitude differ from person to person. Thus to cope up with dynamism and vitality managerial economics also changes itself over some time.
The Scope of Managerial Economics:
Managerial Economics deals with allocating scarce resources in a manner that minimizes the cost. As we have already discussed, Managerial Economics is different from microeconomics and macroeconomics. Managerial Economics has a more narrow scope – it is solving managerial issues using micro-economics. Wherever there are scarce resources, managerial economics ensures that managers make effective and efficient decisions concerning customers, suppliers, competitors as well as within an organization. Also, understand the scope of managerial economics below is.
The fact of scarcity of resources gives rise to three fundamental questions:
What to produce?
How to produce?
For whom to produce?
To answer these questions, a firm makes use of managerial economics principles.
The firstquestion;
Relates to what goods and services should produce and in what amount/quantities. The managers use demand theory for deciding this. The demand theory examines consumer behavior with respect to the kind of purchases they would like to make currently and in future; the factors influencing purchase and consumption of a specific good or service; the impact of change in these factors on the demand of that specific good or service; and the goods or services which consumers might not purchase and consume in future. To decide the number of goods and services to produce, the managers use methods of demand forecasting.
The second question;
Relates to how to produce goods and services. The firm has now to choose among different alternative techniques of production. It has to decide on the purchase of raw materials, capital pieces of equipment, manpower, etc. The managers can use various managerial economics tools such as production and cost analysis, project appraisal methods, etc for making these crucial decisions.
The third question;
It is regarding who should consume and claim the goods and services producing by the firm. The firm, for instance, must decide which is its niche market-domestic or foreign? It must segment the market. It must conduct a thorough analysis of the market structure and thus take price and output decisions depending upon the type of market.
Managerial economics helps in decision-making as it involves logical thinking. Moreover, by studying simple models, managers can deal with more complex and practical situations. Also, a general approach implements. Managerial Economics take a wider picture of the firm, i.e., it deals with questions such as what is a firm, what are the firm’s objectives, and what forces push the firm towards profit and away from profit.
In short, managerial economics emphasizes the firm, the decisions relating to individual firms, and the environment in which the firm operates. It deals with key issues such as what conditions favor entry and exit of firms in a market, why are people paid well in some jobs, and not so well in other jobs, etc. It is a great rational and analytical tool. Managerial Economics is not only applicable to profit-making business organizations but also non- profit organizations such as hospitals, schools, government agencies, etc.
Managerial Economics: Nature, Scope, and Principles, #Pixabay.
Principles of Managerial Economics:
Managerial Economics principles assist in rational reasoning and define thinking. They develop the logical ability and strength of a manager.
Some important principles of managerial economics are:
Marginal and Incremental Principles:
These principles state that a decision says to be rational and sound if, given the firm’s objective of profit maximization, it leads to an increase in profit, which is in either of two scenarios:
If total revenue increases more than the total cost.
If total revenue declines less than total cost.
The 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 the change in total revenue per unit change in output sold. The 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.
The incremental analysis differs from marginal analysis only in that its analysis the change in the firm’s performance for a given managerial decision, whereas marginal analysis often generates a change in outputs or inputs. Incremental analysis is a generalization of the 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 considers as an incremental change. The incremental principle states that a decision is profitable if revenue increases more than costs; if costs reduce more than revenues; if the increase in some revenues is more than the decrease in others; and if the decrease in some costs is greater than the increase in others.
Equi-marginal Principles:
Marginal Utility is the utility derives from the additional unit of a commodity consumed. The laws of Equi-marginal utility state that a consumer will reach the stage of equilibrium when the marginal utilities of various commodities he consumes are equal. According to modern economists, this law has been formulating in the form of the 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.,
MUx / Px = MUy / Py = MUz / Pz
Where MU represents marginal utility and P is the price of the good.
Similarly, a producer who wants to maximize profit (or reach equilibrium) will use the technique of production which satisfies the following condition:
MRP1 / MC1 = MRP2 / MC2 = MRP3 / MC3
Where MRP is the marginal revenue product of inputs and MC represents the marginal cost.
Thus, a manager can make the rational decision by allocating/hiring resources in a manner which equalizes the ratio of marginal returns and marginal costs of various use of resources in specific use.
Opportunity Cost Principles:
By opportunity cost of a decision is meant the sacrifice of alternatives require by that decision. If there are no sacrifices, there is no cost. According to Opportunity cost principle, a firm can hire a factor of production if and only if that factor earns a reward in that occupation/job equal or greater than it’s an opportunity cost.
Opportunity cost is the minimum price that would be necessary to retain a factor-service in it’s given us use. It also defines the cost of sacrificed alternatives. For instance, a person chooses to forgo his present lucrative job which offers him Rs.50000 per month and organizes his own business. The opportunity lost (earning Rs. 50,000) will be the opportunity cost of running his own business.
Time Perspective Principles:
According to these principles, a manager/decision-maker should give due emphasis, both to the short-term and long-term impact of his decisions, giving apt significance to the different periods before reaching any decision. Short-run refers to a period in which some factors are fixed while others are variable. The production can increase by increasing the number of variable factors.
While long-run is a period in which all factors of production can become variable. Entry and exit of seller firms can take place easily. From consumer’s point of view, the short-run refers to a period in which they respond to the changes in price, given the taste and preferences of the consumers, while long-run is a period in which the consumers have enough time to respond to price changes by varying their tastes and preferences.
Discounting Principles:
According to these principles, if a decision affects costs and revenues in the long-run, all those costs and revenues must discount to present values before the valid comparison of alternatives is possible. This is essential because a rupee’s worth of money at a future date is not worth a rupee today. Money has a time value. Discounting can define as a process uses to transform future dollars into an equivalent number of present dollars. For instance, $1 invested today at 10% interest is equivalent to $1.10 next year.
FV = PV*(1+r)t
Where FV is the future value (time at some futures time), PV is the present value (value at to, r is the discount (interest) rate, and t is the time between the future value and present value. Maybe you’d better know about Managerial Economics and their topics Nature, Scope, and Principles.
