Saturday, May 06, 2006

Sunk Costs, Marginal Analysis et all..

Yesterday's class in Managerial Economics involved some Marginal Analysis and Profit Maximization.

Definition :

Marginal Analysis is the analysis of the effect of manufacturing/producing ONE MORE piece on profits and profit margins.


In other words, it's a way to say if the "situation" can be improved by making a small change to the current activity. The professor went on to give us an example.
He took a cricketing example and proceeded to explain it to us. "Imagine if your top 3 batsmen were out for 150 runs. Then the average would be 150. If your 4th batsman came and in scored only a 40 before getting out, now your average drops. What does this mean?"

Almost instantly came an arbit CP "The batsman must be Ganguly!".

Tch tch tch. And to think it was just last year that Ganguly and the Indian team's success were part of a case study in one of the IIM's.


My managerial economics course also refers to something called as Sunk Cost.

Definition :

Sunk Cost - Common costs beyond recovery.


For all comparisons, such costs should not be considered.
So, these days people at ISB never talk about the Sunk Cost (Rs. 15,00,000). We talk about how screwed we're getting over petty stuff like lunch, dinner, breakfast, etc. Different attitudes all around. Some with the view, "I"m already sunk, so who cares if I spend 50 bucks more!". Some with the view "I shall not sink anymore, I'll just starve to death!". And some more with my view "If they give something free, I'll take Rs. 15,00,000 worth it to make up for my sunk cost". Who is the smartest kind? Well, that is all a matter of perception :-).

1 Comments:

Blogger FSN 2.2 said...

Didn't they teach you this in class?

"There is no such thing as a free lunch" ;-)

That's the only line I remember from my microeconomics class. However all this stuff you're mentioning bangs out some memories...

Prof: "What is opportunity Cost?"

A brother sitting in the back "It what I'm now missin out on, when I could be out getting some"

I think the prof actually gave him participation points because he did make sense...
.

3:17 PM  

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