Managerial Economics Managerial Economics is a branch of economics. With the help of this branch, we can apply Economics in decision making. Managerial Economics bridges the gap between economic principles/ theory and managerial practice. To take a specific decision, this branch applies micro economic analysis. We can apply the principles of Economics in taking decisions related to some problems like scale of operation, quantum of resources to be employed, marketing etc. Because of the scarcity of the resources it is not possible to have whatever we want.
To get the better value from limited resources it is essential to evaluate the difference between the total cost and the total benefits of any activity. To choose the better option one of the tools provided by the managerial economics is marginal analysis. By weighing the marginal benefits against the marginal costs one can take the best decision. Marginal Costs- Marginal cost is the change in total cost when one more unit is produced. Marginal cost occurs when an activity increases by one unit. When the firm increases its production the total cost always increases even though the marginal costs may not rise.
Rise in marginal costs is shown in the below chart. Following table shows the total cost and the marginal cost by making pizza: |Quantity |Total Cost |Marginal Cost | |0 |0 |– | |1 |5 |5 | |2 |10 |5 | |3 |17 |7 | |4 |25 |8 | |5 |34 |9 | |6 |44 |10 | 7 |58 |14 | |8 |73 |15 | |9 |90 |17 | |10 |110 |20 | [pic] (MARGINAL ANALYSIS) Marginal Benefits- Marginal benefit is change in total benefit when one more unit is produced or when an activity increases by one unit. Change in revenues when a firm sells one more unit of good, is known as marginal revenue. Change in total satisfaction by consuming one more unit of a good is known as marginal utility.
Following table shows the total benefit and the marginal benefit by consuming pieces of pizza: |Quantity |Total Benefits |Marginal Benefits | |0 |0 |– | |1 |30 |30 | |2 |55 |25 | |3 |75 |20 | |4 |90 |15 | |5 |103 |13 | |6 |113 |10 | |7 |121 |8 | |8 |126 |5 | |9 |130 |4 | |10 |132 |2 | [pic] (MARGINAL ANALYSIS)
From the above table it is clear that as the number of consumption increases, marginal benefits tend to decreases. From the first piece of pizza marginal benefit is 30 units while from tenth piece it is only 2 units. As a result the marginal curve slopes downward. In the above example efficiency occurs at that point where the marginal costs and marginal benefit curves intersect. Intersection point of marginal cost and marginal benefit is the efficient level of output. (MARGINAL ANALYSIS) [pic] Marginal analysis is very helpful in taking managerial decisions. But there are some limitations too. Decisions can be with constraints and without constraints.
If the one take decision without constraints, the person can continue doing an activity until the marginal benefit is greater than or equal to the marginal cost. If the decision is with constraints, it is not possible to use marginal analysis in decision making. Some assumptions are assumed while applying this concept of managerial economics. References 1. Wessels, W. J. Economics. Barron’s Educational Series. 2. Baumol, W. J. Economic Theory and Operations Analysis. Prentice Hall. 3. MARGINAL ANALYSIS. Retrieved on October4, 2005 from: http://sorrel. humboldt. edu/~economic/econ104/marginal/ 4. Decision Making Using Marginal Analysis. Retrieved on October4, 2005 from: http://people. eku. edu/watkinst/Economics%20120/Decision-making. doc