Marginal and Incremental Principle, Principle of Managerial Economics Assignment Help

Basic principles of managerial economics - Marginal and Incremental Principle, Principle of Managerial Economics

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Marginal and Incremental Principle

A manager has to keep and use resources of production carefully as they are scarce. The marginal analysis helps to assess the impact of a unit change in one variable on the other variable. For i.e., a firm’s decision to change prices would depend on the resulting change in marginal revenue & marginal cost and changes in these variables would in turn, depend on the units sold as a result of a change in price and change in the price is desirable if the additional revenue earned is more than that additional cost. Same, decision on additional investment is taken on the basis of the additional return from investment that is the marginal changes. 

The word 'marginal' is also used for such small changes. In contrast, incremental concept applies to changes in revenue & cost due to a policy change. For i.e., additional cost of installing computer facilities will be incremental cost & the additional revenue earned due to access to Internet will be incremental revenue. Thus, a change in output because of a change in process, product or investment is regarded as an incremental change, Incremental reasoning highlights the fact that incremental cost, rather than full cost, should be taken in consideration to assess the profitability of a decision. The incremental principle states that a decision is profitable when: 

it increases revenue more than costs; 

it reduces costs more than revenues. 

it decreases some costs to a greater extent than it increases others; 

it increases some revenues more than it decreases others

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