# Fundamental Concepts of Economics

## Opportunity cost :

• Opportunity cost of any good is the value of next best alternative good that is satisfied.
• In words of Ferguson “ the alternative or opportunity cost of producing one unit of commodity “X” is the amount of commodity  “Y” , that must be sacrificed in order to use resources to produce , X rather than “Y”.

### Examples

• The opportunity cost of  the funds employed in one’s own business is the interest that could be earned on those funds had they been employed in other venture.
• The opportunity cost of the times of entrepreneur devotes to his own business is the salary he could earn by working somewhere else.
• OC requires ascertainment of sacrifice. If a decision involves no sacrifice, its opportunity cost is Zero.
• The opportunity cost of given sum of money can never be zero.

## Discounting principles :

• Concept has relevance in view of Time dimension involved in the decision making.
• Time value of money : refers to the fact that a dollar / rupee to be received in the future is not worth a \$/Rs today.
• It is important to know a technique to measure present value of dollar to be received or paid at different points in the future.

Present value of an amount

PV= s [ 1/ (1+ i)n ]

Where s = future value

i= interest rate

### Examples

• What is the present value of \$1080 in 1 yr if the interest rate is 8% per yr?
• PV= \$ 1080 [ 1/ 1.08]1
•        = \$ 1000
• In one yr\$ 1000 would increase to \$ 1080 at 8% interest.

2.

• What is the pv of \$ 100000 to be received at end of 10 yrs if the rate of interest is 10%?
• PV = 100000 [1/1.10]10
• = \$ 38550
• The process of  reducing a future amount to its present value is often referred to as Discounting Principles.

Interest rate used in the present value is referred to as Discount Rate.

## Marginalism Principle :

• In economic theory any firm makes a decision to produce by equating marginal revenues with marginal costs.(MR=MC)
• Marginal Revenues- is the change in the Total revenue resulting from one unit change in the volume of output produce.
• Marginal Cost- it refers to the cost of producing additional unit of output.
• Marginal Product- it is the addition made to total produce as a result of employing an additional factor of production (labor)

Marginal concepts are always defined in terms of unit changes .

### Example

Suppose 200 labourers working on a plot of one acre land can produce 250 tons of some output, Q . If one more labor is added , total production shoots up to 251.3 tons . Marginal product due to 201 th labour is 1.3 tons .

## Time Perspective :

• Economics normally make a difference between Long Run & Short Run.

### short run

• }It is the period of time in which output can be increased or decreased by changing the  amount of variable factors .
• In short run quantities of fixed factors cannot be varied for making changes in output.

### Long run

• Period of time in which quantities of all factors may be varied.
• In long run output can be increased not only by using more quantities of labor / Raw material but also expanding the size of existing plant or by building new plant.

## Equilibrium :

### Consumers Equilibrium

• When he is able to maximize his satisfaction from  his fixed income and other resources at his disposal.

### Firms Equilibrium

Selling its good at a price that maximizes the profits.

### Industry Equilibrium

When there is no incentive for old firms to leave it and for new ones to enter it.

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