Jawaharlal Nehru Technological University Hyderabad MBA 1 BUSINESS ECONOMICS Previous Question Paper (July/August - 2021 - R19)

Opportunity cost is the value of the next best alternative foregone when a decision is made to allocate resources to a specific use. It represents the benefits an individual, investor, or business misses out on when choosing one alternative over another.

The Incremental Principle states that a decision is profitable only if it increases total revenue more than it increases total cost. It focuses on the changes in costs and revenues resulting from a specific management decision. The key components are:

• Incremental Cost: The additional cost incurred due to a specific business decision.
• Incremental Revenue: The additional revenue generated by the same decision.

If incremental revenue exceeds incremental cost, the decision is considered economically sound.

Time Perspective in economics refers to the distinction between the short run and the long run when making business decisions. Managers must consider both the immediate impact of a decision and its long-term consequences on revenue and costs.

The Discounting Principle is based on the concept that a rupee today is worth more than a rupee tomorrow due to the time value of money. Its salient features include:

• Time Value of Money: It recognizes that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.
• Present Value Calculation: It involves converting future cash flows into their current equivalent value using a discount rate.
• Decision Making: It allows firms to compare investment projects with different time horizons by standardizing them to a common present value.
• Formula: The present value is calculated as
  PV = F / (1 + r)^n
  where F is the future value, r is the discount rate, and n is the number of years.