Ms09

Given the profit function of a firm in the form of table, calculate total profit, average profit and marginal profit and differentiate between incrementalism and marginalism.

Unit of Output Total Revenue Total Cost Total Profit Average Profit Marginal Profit

1 10 5 5 5 0

2 30 18 12 9 7

3 50 29 21 9.6 8

4 70 38 32 8

the concept of' margin' is very useful; it renders the determination/derivation of an equilibrium solution quite simple and easy. However, in the real world of business management, marginalism should better be replaced by incrementalism, -In making economic decision, management is interested in knowing the impact of a chuck-change rather than a unit-change. Incremental reasoning involves a measurement of the impact of decision alternatives on economic variables like revenue and costs. Incremental revenues (or costs), for example, refer to the total magnitude of changes in total revenues (or costs) that result from a set of factors like change in prices, products, processes and patterns.

The distinction between marginalism and incrementalism may' be illustrated with the help of an example. Suppose 200 laborers working on a plot of one acre land can produce 250 tons of some output, Q. If one more laborer is added to the crew, then total production shoots up to 251?3 tons. In this case, the marginal product due to the 20lth laborer is 1?3 tons. In real world, factor proportion may not be nicely divisible. We may know that 2lO laborers can produce 260 tons of Q. In this case, the order of incremental volume of output, if we decide to add 10 laborers to a crew of 200, turns out to be 10 tons of Q. Here the average incremental output turns out to be I ton per one laborer. The reader may verify at this stage that:-

1. Marginal concepts are always defined in' terms of unit changes, but incremental' concepts are defined in terms of chunk changes.

2. Incremental -concepts are more...