![]() Suppose the production manager is considering an increase in output from 2,000 to 3,000 units. In Fig 1.1 the MC curve is rising over most of its range. However, the term ‘incremental cost’ may be used to refer to the change in cost brought about by the changes in production process or activity.The following diagram may be used to compare the marginal and incremental approaches. It is, of course, possible to compare the MC of one process with that of another but not of the MC of the change. Marginal analysis is not suited for this type of decision. The problem here is one of comparing the cost of the first process with -that of the alternative. For example, the production manager may be faced with the problem of substituting one process of production (or activity) for another to produce the same output. But managerial decision making is not to be concerned with changed output at all. In general we restrict the two terms: MC and MR to the effects of changes in output. Incremental concepts are more flexible than marginal concepts. In this case the unit (average) MC over this range of output is Rs. 400 to 470), we can speak of an incremental cost of Rs. If a 5-unit increase in output increases total cost by say Rs. 10 and the extra revenue made by selling this extra unit is Rs. Suppose, the extra cost of producing one extra unit of output is Rs. Likewise, the latter may be defined as the change in total revenue resulting from a decision.Ī simple example will illustrate the two concepts: the marginal concept and the incremental concept. The former refers to the change in total cost resulting from a decision. ![]() Two basic concepts lie at the heart of incremental analysis, viz., incremental cost and incremental revenue. Coyne has put it, “It involves estimating the impact of decision alternatives on costs and revenues, stressing the changes in total cost and total revenue that result from changes in prices, products, procedures, investments or whatever may be at stake in the decision”. It is easy to describe incremental reasoning. The following points highlight the seven fundamental concepts of managerial economics. ![]()
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