ASSIGNMENT COVER PAGE
Name of Student: VAIBHAV SHINDE
Batch: JAN 2024 BATCH
WHAT IS INCREMENTAL PRINCIPAL? HOW DOES
Program:
IT DIFFER FROM TIME PERSPECTIVE PRINCIPAL
Subject & Code: ECONOMIC FOR MANAGERS-113
Semester: 1ST SEM
Learner ID: 2325010115
NECESSARY INSTRUCTIONS
1. Cover Page must be filled in Capital Letters. All Fields of the Form are compulsory to be filled.
2. The assignment should be written / computer typed on A4 size paper and it should be neat
and clearly readable.
3. The cover page should be stapled at the front of each and every assignment.
4. Incomplete Assignments will not be accepted.
What is the Incremental Principle? How does it differ from the Time
Perspective Principle?
Introduction
(1). Incremental Principle
The Incremental Principle is probably the most important concept in economics and is certainly the most
frequently used in Managerial Economics. Incremental Principle states that a decision is profitable if
revenue increases more than costs; if costs reduce more than revenues; if increase in some revenues is
more than decrease in others; and if decrease in some costs is greater than increase in others.
Incremental Concept is closely related to the Marginal Cost and Marginal Revenues of Economic Theory.
The Two Major concepts in this analysis are:
(i). Incremental Cost: The Incremental Cost may be defined as the change in Total Cost resulting from
a particular decision.
(ii). Incremental Revenue: The Incremental Revenue means the change in Total Revenue resulting
from a particular decision.
The Incremental Principle may be stated as under:
A decision is clearly a profitable one if-
(I). It increases revenue more than costs.
(II). It decreases some cost to a greater extent than it increases others.
(III). It increases some revenues more than it decreases others.
(IV). It reduces costs more than revenues.
For Example: Suppose a New Order is estimated to bring in an additional revenue of Rs 10000. The
Costs are estimated under:
(A). Labour Rs 3000
(B). Materials Rs 4000
(C). Overhead Charges Rs 3600
(D). Selling and Administrative Expenses Rs 1400
(E). Full Costs Rs 12000
The Oder appears to be unprofitable. For it results in a loss of Rs 2000.
(2). Time Perspective Principle
The Time Perspective Principle states that the decision maker must give due consideration both to the
Short Run and Long Run effects of his decisions. He must give due emphasis to the various time periods.
It was Marshall who introduced time element in economic theory.
In economics, we often draw a distinction between the Short-Run and Long-Run. This distinction is not
based on any calendar period, say, a month, a quarter or a year. It is based in the speed with which
decisions can be made and factors of production varied.
By Short Run they mean that period within which some of the inputs (called Fixed Inputs) cannot be
altered, while in the Long Run all the Inputs can be changed.
In the Short Period, the Firm can change its output without changing its Size. In the Long Period, the
Firm can change its Output by changing its Size. In the Short Period, the output of the industry is fixed
because the firms cannot change their size of operation and they can very only “variable” factors. In the
Long Period, the output of the industry is likely to be more because the firms have enough time to
increases their sizes and also use both variable and fixed factors.
A decision may be made on the basis of Short Run considerations, but may as Time elapses have Long
Run Representations which make it more or less profitable than it at First appeared.
For Example: In one of the case studies Haynes, Mote and Paul refer to the examples of a printing
company which never quotes prices below full cost due to the following reasons:
(I). The Management realized that the long run repercus-sions of pricing below full cost would more
than offset any short run gain.
(II). Reduction in rates for some customers will bring undesirable effect on customer goodwill.
Therefore, the managerial economist should take into account both the short run and long run effects as
revenues and costs, giving appropriate weight to most relevant time periods.
Conclusion
The Incremental Principle is useful when the firm wants to expand the production of a commodity.
Economists use this Incremental Principle in the theories of consumption, production, pricing and
distribution of the commodity in the market whereas the principle of Time Perspective Principle states
that a manager or decision-maker should properly emphasis the short- and long-term effects of his
judgments by appropriately weighting the various time periods before making a choice.
If the Incremental Revenue is higher than Incremental Cost, then it is profitable for the manager to
expand the business. The moment the incremental revenue is equal to incremental cost, the manager is
required to stop further expansion. Incremental Principle is very much used in decision taking while
from Time Perspective Principle of the Consumer, the Short-Run refers to the time period during which
they
react to price changes based on their tastes and preferences, whereas the Long-Run refers to the time
period during which they have adequate time. In the Short Run, some variables are fixed while others
are subject to change. By increasing the number of variable parameters, the productivity can be boosted
whereas Long Run is a time frame during which all production elements are susceptible to change. It is
simple for selling enterprises to enter and exit.
This is how the Incremental Principle is differed from Time Perspective Principle.
