Question

Identify and apply six principles of effective managerial decision making.

Short answer

The six principles of effective managerial decision making are:

1. The incremental principle.

2. Marginal principle.

3. The opportunity cost principle.

4. Discounting principle.

5. Concept of time perspective principle.

6. Equi -Marginal principle.

Step-by-step solution

(a) The incremental marginal.

The incremental concept is probably the most important concept in economics and is certainly the most frequently used in managerial economics. Incremental concept is closely related to the marginal cost and marginal revenues of the economic theory.

The two major concepts in this analysis are incremental cost and incremental values.

(b) Marginal principle.

The marginal analysis implies judging the impact of a unit charge in one variable on the other. Marginality generally refers to small changes. Marginal revenue is change in total revenue per unit charge in output sold.

Marginal cost refers to change in total cost as per unit charge in output produced. If the marginal revenue is greater than the marginal cost, then the firm should bring about the change in price.

(c) The opportunity cost principle.

Both micro and macro economics make abundant use of fundamental concept of opportunity cost. In managerial economics, the opportunity cost concept is useful in decision involving a choice between different alternative courses of action.

(d) Discounting principle.

This concept is an extension of the concept of time perspective. It is simply that in the intervening period a sum of money can earn which is ruled out if the same sum is available only at the end of the period.

The mathematical technique for adjusting for the time value of money and computing present value is called “discounting”.

(e) Concept of time perspective principle.

The time perspective concept states that the decision maker must give due consideration both to the short run and long run effects of his decision.

In the short period, the average cost of a firm may be either more or less than its average revenue.

In the long period, the average cost of a firm will be equal to its average revenue.

(f) Equi-Marginal principle.

One of the widest known principles of economics is the equi-marginal principle. The principle states that an output should be allocated so that value added by the last unit is the same in all cases. This generalization is popularly called as the equi-marginal.