What are main 6 Principles of Managerial Economics?

1. Marginal Analysis

Marginal analysis helps in decision-making by studying how a small change in one factor affects another.

🔹 Marginal Revenue (MR) → Extra revenue earned by selling one more unit.
🔹 Marginal Cost (MC) → Extra cost incurred by producing one more unit.

Decision Rule:
✔ If MR > MC, increase production to maximize profit.
✔ If MC > MR, reduce production to avoid losses.

Example:
A company sells 100 units at ₹10 each (Total Revenue = ₹1,000).
Selling one more unit raises total revenue to ₹1,010.
Marginal Revenue = ₹10 (₹1,010 - ₹1,000).

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2. Incremental Analysis

Incremental analysis studies the overall impact of a business decision by comparing the total change in costs and revenues.

🔹 Used for major decisions like launching a new product, upgrading machinery, or expanding operations.

Decision Rule:
✔ If Revenue increases more than Costs, the decision is profitable.
✔ If Costs decrease more than Revenues, the decision is beneficial.

Example:
A company considers opening a new branch:

• Current revenue: ₹10 lakh

• Expected new revenue: ₹15 lakh

• Additional cost: ₹3 lakh
  Since revenue increases more than cost, opening the branch is a good decision.

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3. Equi-Marginal Principle

To maximize satisfaction or profit, resources should be allocated where they give equal benefit per unit of cost.

For Consumers:

Consumers distribute their income so that the marginal utility per rupee spent is the same for all goods.

📌 Formula:
MUx/Px = MUy/Py = MUz/Pz

💡 Example:
If tea gives more satisfaction per rupee than coffee, the consumer will buy more tea.

For Producers:

Producers allocate resources where the marginal revenue product (MRP) per unit of cost is the same for all inputs.

📌 Formula:
MRP1/MC1 = MRP2/MC2 = MRP3/MC3

💡 Example:
A company decides whether to invest in labor or machines based on which gives the best return.

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4. Opportunity Cost Principle

Opportunity cost is the value of the best alternative foregone when making a decision.

Example:
A person quits a ₹50,000/month job to start a business.
Here, ₹50,000 is the opportunity cost of running the business.

✔ A company will only use a resource if its return is equal to or greater than its opportunity cost.

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5. Time Perspective Principle

Managers should consider both short-term and long-term effects of a decision.

Short Run:

• Some factors are fixed.

• Output increases by using more variable inputs (e.g., hiring more workers).

Long Run:

• All factors can be changed.

• Firms can enter or exit the market.

💡 Example:
In the short run, a company may increase advertising to boost sales.
In the long run, it may invest in product innovation to stay competitive.

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6. Discounting Principle

The value of money decreases over time due to inflation and interest rates.

📌 Formula:
FV = PV × (1 + r)ᵗ

• FV = Future Value

• PV = Present Value

• r = Interest/Discount Rate

• t = Time Period

💡 Example:
₹100 today, invested at 10% interest, will be worth ₹110 next year.