Opportunity cost is a key concept in economics, and has been described as expressing the basic relationship between scarcity and choice. Demand, supply, cost, production, market, competition, price, etc. Opportunity cost principle economics l concepts l topics. Opportunity cost is the value of the next best thing you give up whenever you make a decision. Opportunity cost versus outofpocket cost previous discussions pointed out that opportunity cost is one of the most important and useful concepts in economic analysis because it highlights the consequences of making choices under conditions of scarcity. The concept of opportunity cost, an integral part of classical economic theory, is more than two hundred years old. Introduction to managerial economics definition and nature of managerial economics. Because by definition they are unseen, opportunity costs can be easily.
When an option is chosen from alternatives, the opportunity cost is the cost incurred by not. This implies that one commodity can be produced only at the cost of foregoing the production of another commodity. Therefore, both the concept of scarcity and opportunity cost are helpful in managerial economics in evaluating the various alternatives available when scarce economic resources are. People usually think about the margin or the profit they will earn before investing their money or resources at a particular project or person. Economics introduction economics is the social science that is concerned with the production, distribution, and consumption of goods and services. Opportunity cost principle, incremental principal, principle of time perspective, discounting principle and equimarginal principle.
The utility has to be more than the opportunity cost for it to be a good choice in economics for example, opportunity cost is how much. These also explain how managerial economics is an integral part of business. When economists refer to the opportunity cost of a resource, they mean the value of the nexthighestvalued alternative use of that resource. Opportunity cost principle incremental principal, principle of time perspective, discounting principle. If a gives twice as much pleasure as b, and there is no c that gives more pleasure than b and is comparable such as uses time, effort, or some other resource, then as. Managerial economics and financial analysis pdf notes. The opportunity cost of a good or of performing an action, also known as the greatest cost, is the lost value of alternate options that could have been chosen, rather than the one that was chosen. Application of managerial economics in decision making. Opportunity cost is the profit lost when one alternative is selected over another. We can now use this term in a more specific way to help explain the concept of relevant cost. Opportunity cost is the value of something when a particular course of action is chosen.
Economics looks at how rational individuals make decisions. Meaning, characteristics, scope and subject matter relationship with other disciplines decision making and forward planning fundamental principles of managerial economics. Managerial economics requires a lot of logical thinking and creative skills for decision making or problemsolving. In this example if you were to go clubbing opportunity costs are. Twopart pricing, block pricing, bundling pricing, peak load pricing, cross subsidization. Explain the concept of opportunity cost and explain why accounting profits and economic profits are not the same. Economists use the term opportunity cost to indicate what must be given up to obtain. Opportunity cost is the benefit that is missed or given up when an investor, individual or business chooses one alternative over another. The idea of an opportunity cost was first begun by john stuart mill. Opportunity cost is a key concept in economics, and has been described as expressing the basic relationship. Definition opportunity cost is the next best alternative foregone.
Pdf bba managerial economics notes, ebook free download. Relevant costs, on the other hand, are costs that you actually incur and pay because you chose the alternative that brought them on. It is also considered to be a stream of science by some economist claiming that it involves the application of different economic principles, techniques and methods, to solve business problems. Principles of economicsopportunity costs wikibooks. Your opportunity costs result from income not earned because you decided to do something else. The opportunity cost of the value of opportunity lost is taken into consideration when alternatives are compared. The subject offers powerful tools and techniques for managerial policy making. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you cant spend the money on something else. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you cannot spend the money on something else. The opportunity cost of any action is simply the next best alternative to that action or put more simply, what you would have done if you didnt make the choice that you did. When economists use the word cost, we usually mean opportunity cost. Opportunity cost analysis is an important part of a companys decisionmaking processes but is not treated as an actual cost in any financial statement.
When economists refer to the opportunity cost of a resource, they mean the value of. These are all those expense item appearing in the books of account, hence based on accounting cost concept. It is the loss of potential gain from other alternatives when one alternative is chosen. Economics introduction economics l concepts l topics l. The marginal cost of the managerial control variable q, is the change in total costs arising from a change in the control variable.
Webster defines managerial economics as the application of economic theory and quantitative methods mathematics and statistics to the managerial. Meaning of opportunity cost and its economic significance. Opportunity cost is the thing that is staring you in the face everytime you make a decision. Out lay cost also known as actual costs are those expends which are actually incurred by the firm these are the payments made for labour, material, plant, building, machinery traveling, transporting etc.
If, for example, you spend time and money going to a movie, you cannot. The opportunity cost of anything is the alternative that has been foregone. If you decide to spend two hours studying on a friday night. What to know about opportunity cost for the pmp exam. This concept of scarcity leads to the idea of opportunity cost. W hen economists refer to the opportunity cost of a resource, they mean the value of the nexthighestvalued alternative use of that resource. Demand determinants, cost concepts, opportunity cost, fixed vs. The globalization of business is reflected in all of the following except. Versus microeconomics 3 what is managerial economics 4 theories and models 5 descriptive versus prescriptive managerial economics 8 quantitive methods 8 three basic economic questions 9 characteristics of pure capitalism 11. The benefit or value that was given up can refer to decisions in your personal life, in a company, in the economy, in the environment, or on a governmental level. The concept of opportunity cost microeconomics reading. Managerial economics managerial economics syllabusunit 1 managerial economics. By considering opportunity cost while making a selection from several promising project, the limited resources can be allowed to be utilized in the most efficient manner.
The cost function for the ice cream bar venture has two components. As adam smith observed, if a hunter can bag a deer or a beaver in the course of a single day, the cost of a deer is a beaver and the cost of a beaver is a. Holtzman sometimes choosing one alternative means losing money because you turned down another alternative. Which of the following is the best definition of managerial economics. Use this book to reinforce the concept of opportunity cost after completing part 2 in lesson 3. We study some important concepts of costs, and traditional and modern theories of cost. Opportunity costs are fundamental costs in economics, and are used in computing cost benefit analysis of a project. This work focuses on opportunity cost as it affects decision making, managing, and business problem solvingwhere the acceptance of one alternative precludes the acceptance of others. In this regard the opportunity costs not involving cash flows are not recorded in the books of accounts, but they are.
Managerial economics and financial analysis notes pdf mefa notes pdf book starts with the topics definition, nature and scope of managerial economics demand analysis. It helps in covering the gap between the problems of logic and the problems of policy. Introduction to managerial economics definition and. Concepts and tools is intended as a textbook for managerial economics courses in business and management postgraduate progammes. An explicit cost represents clear, obvious cash outflows from a business that reduce its bottomline profitability. Opportunity costs in managerial accounting dummies. Opportunity costs in managerial accounting by mark p. This book is full of reproducibles that include lessons and activities for teaching. In economics, risk describes the possibility that an investments actual. The concept of opportunity cost in economics opportunity cost is a great first step in thinking like an economist. The following points highlight the seven fundamental concepts of managerial economics. While the term opportunity cost has its roots in economics, its also a very important concept in the investment world. Opportunity cost analysis is an important part of a companys decisionmaking processes, but is not treated as an actual cost in any financial statement. This contrasts with lesstangible expenses, such as goodwill.
The study of economics relies heavily on making choices. Managerial economics is a discipline that combines economic theory with managerial practice. Every decision involves an opportunity cost which the cost of those options which we let go while selecting the most appropriate one. The concept is useful simply as a reminder to examine all reasonable alternatives before making a decision. Meaning, characteristics, scope and subject matter relationship with other disciplines decision making and forward planning. Simply put, the opportunity cost is what you must forgo in order to get something. Gregory mankiws principles of microeconomics, 2nd edition, chapter 1 p. A benefit, profit, or value of something that must be given up to acquire or achieve something else.