Theory of cost in managerial economics. Various Theories of Cost (With Diagram) 2019-01-05

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Managerial Economics Notes for MBA

theory of cost in managerial economics

Suppose, the total cost of producing 500 units is Rs. In other words, a major portion of the economic theory to be used in this text can be fruitfully utilized in a wide variety of decision-making situations. The economic significance of opportunity cost is as follows: 1. It seems that the subject will become more and more popular in future. Thus, on one hand, cost per unit of output goes up and on the other revenue per unit decrease. However, the size of the market depends on a host of economic and non- economic factors which are usually incorporated in the theoretical demand function which is repre­sented by the demand curve and the familiar cete­ris paribus other things remaining the same as­sumption. In reality they are inseparable.


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Theory of the Firm

theory of cost in managerial economics

Hawley believed that profits arise from factor ownership as long as ownership involves risk. While the latter deals with the decision making in profit making organizations, the former provides methods and a point of view that are also applicable in managing non-profit organizations like hospitals and public corporations like the Indian Airlines Corporation. The management is more interested in future costs because it can exercise some control over them. For this, the managers have to understand and deal with vari­ous unknown factors such as the substitutability of capital for labour using computers rather than part-time accountants , the tax implication of such substitution, the economic characteristics of the production process such as diminishing return, re­turn to scale, etc. Managerial economics is slightly specific in its approach.

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Managerial Economics Notes for MBA

theory of cost in managerial economics

Any model or theory must necessarily simplify. To sum up, production costs fall smoothly and managerial costs rise slowly at very large scales of output. The Environment of the Firm : One of the goals of this title is to get the reader to look at the world of microeconomics both through the looking glass of an economist and from the perspective of a business person. Suppose, a firm having a temporary idle capacity, received an order for 10,000 units of its product. Such payments as rent, wages, interest, salaries, payment for raw materials, fuel, power, insurance premium, etc. The productivity of labour and capital can be satisfactorily measured by using various techniques introduced in managerial eco­nomics. Importance of Distinction between Fixed and Variable Costs : This distinction is important in price theory.

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Various Theories of Cost (With Diagram)

theory of cost in managerial economics

Supply along with demand determines price. Firms of different types and size arise in an economy because they have been able to organize production more efficiently than other types of in­stitutions could. However, the question arises: benefits for whom? The reason behind this is that whereas average cost is the aggregate of average fixed cost and average variable cost, marginal cost refers only to change in average variable cost. It is the task of economic theory to help managers know what information should be obtained, how to process it and finally, how to use it. In formulating this theory, Walker assumed a state of perfect completion in which all firms are presumed to possess equal managerial ability each firm receives only the wages which in Walker view forms no part of pure profit. But statistics, vital as it is, ultimately pro­vides only part of the input needed in decision making.

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MANAGERIAL THEORIES OF THE FIRM

theory of cost in managerial economics

On the contrary, future costs refer to the costs that are reasonably expected to be incurred in some future periods. Rational pricing and com­petitive marketing decisions are based on considerable knowledge of specific product markets and industry behaviour on the part of the business econ­omist. Managerial economics deals with production functions or relationships between input and output changes. However, in reality, very few managers actually seek the greatest attainment of a single goal. Opportunity cost, therefore, represents the benefits or revenue forgone by pursuing one course of action rather than another. According to Hawley, Profit is simply the price paid by society assuming business risks.

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Theories of Profit in Economics

theory of cost in managerial economics

In case of absence of risks, an entrepreneur would cease to be an entrepreneur and would not receive any profit. They are also called imputed costs. Using the de­mand equation or model of demand, a car manufac­turer, for instance, could quickly estimate the ef­fects on sales of changes in price or advertising expenditure. Managerial economics is slightly broader than microeconomic theory. They increase as output increases.

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Theories of Profit in Economics

theory of cost in managerial economics

So most business decisions have to be taken under highly uncertain conditions. Financial Applications : Most financial decisions such as capital equip­ment replacement, depreciation and capital bud­geting decisions have their roots in the economics of time and uncertainty. A, Modern Micro Economics, Macmillan Publishers Ltd. This point is illustrated in Fig. It can be shown with the help of a figure 5.

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Theory of the Firm

theory of cost in managerial economics

Likewise, in order to achieve production efficiency, a firm may be required to utilize more capital than would be necessary if the objective was minimizing the cost of raising capital. Economists in various government departments and public sector organi­zations are also concerned with project evaluation and cost-benefit analysis. Some of these are competing concerns, such as how environmental concerns could curtail production objectives. Governments should try to obtain the maximum benefit for tax payers in spending their revenues; government agencies can measure their efficiency through cost-benefit analysis. Thus, fixed costs are unavoidable which occur even at the zero level of output. Cris Lewis, Managerial Economics, Prentice-Hall of India, New Delhi, 2003. When in the short-run a firm increases its production due to indivisibilities of fixed factors, it gets various internal economies.

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Theory of the firm: Managerial behavior, agency costs and ownership structure

theory of cost in managerial economics

The implementation of cost reduction programmes, the selection of more productive alter­natives, the enhancement of revenues and the adoption of other measures can help to maximize the service and the social contribution of these in­stitutions. Thus, the manage­ment has to more than double variable inputs such as labour in order to double output. The result is that they refuse orders that do not cover full costs plus a provision of profit. . Although profit plays an important role in these theories as well, it is no longer seen as the sole or dominating goal of the firm. You may say that I would be indifferent between Rs.

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Fundamental Concepts of Managerial Economics

theory of cost in managerial economics

We may well start with a few definitions. Students can Download the Study materials in the Pdf format Which can be Helps in their Academic preparation. The allocation of machines and manpower among different activities or products in a multi-product firm is an obvious example of this. It is concerned with those analytical tools and techniques which are useful or are likely to be so as to improve the deci­sion making process within the firm. Senior management has to integrate these diverse functions so as to sub serve the overall objective of the company. The elasticity of productivity is defined as the ratio of proportional change in output to the proportional change in inputs.

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