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Eulers theorem for Managerial Economics Mcom Delhi University

Eulers theorem for Managerial Economics Mcom Delhi University

Eulers theorem for Managerial Economics Mcom Delhi University:

Managerial economics is the “application of the economic concepts and economic analysis to the problems of formulating rational managerial decisions”. It is sometimes referred to as business economics and is a branch of economics that applies microeconomics analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis, correlation and calculus. If there is a unifying theme that runs through most of managerial economics, it is the attempt to optimize business decisions given the firm’s objectives and given constraints imposed by scarcity, for example through the use of operations research, mathematical programming, game theory for strategic decisions, and other computational methods.

Managerial decision areas include:

  • assessment of investible funds
  • selecting business area
  • choice of product
  • determining optimum output
  • sales promotion.

Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:

  • Risk analysis – various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk.
  • Production analysis – microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm’s cost function.
  • Pricing analysis – microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.
  • Capital budgeting – Investment theory is used to examine a firm’s capital purchasing decisions.


Managerial economics to a certain degree is prescriptive in nature as it suggests course of action to a managerial problem. Problems can be related to various departments in a firm like production, accounts, sales, etc.

  1. Demand decision.
  2. Production decision.
  3. Theory of exchange or price theory.
  4. All human economic activity.

Eulers theorem for Managerial Economics Mcom Delhi University:In this article we will discuss about Euler’s theorem of distribution.

According to marginal productivity theory, every input is paid the value of its marginal product. This means that the entire product will always be handed out to those who work on it. In other words, the sum of the marginal products add up exactly to the total output. There is thus neither a surplus nor a deficit left at the end.

This proposition can be proved by using Euler’s Theorem. It suggests that if a production function involves constant returns to scale (i.e., the linear homogeneous production function), the sum of the marginal products will actually add up to the total product.

This can be proved by the total differentiation theorem. Now, if we have the function z = f(x, y) and that if, in turn, x and y are both functions of some variable t, i.e., x = F(t) and y = G(t), then

So the effect of a change in t on z is composed of two parts: the part which is transmitted via the effect of t on x and the part which is transmitted through y. Thus, the latter is represented by the expression (∂f/∂y) (∂y/∂t).

Here (dy/dt) shows the change in y produced by the increment in t and (∂f/∂y) is the resulting change in z produced by each unit of this change in y.

Eulers theorem for Managerial Economics Mcom Delhi University

It follows from a linear homogenous production function

P = g (L, C), where we have, for any k,

kP = g(kL, kC)

If we now take the total derivative of kP with respect of k [i.e., setting kP=z, kL=h, kC=y, and k=t in our formula for (dz/dt)] we get

Since this result holds for any value of k it is must also be valid for k = 1 so that

P = ∂g/∂L L + ∂g/∂C C

This is Euler’s Theorem for the linear homogenous production function P = g (L, C). The proof can be extended to cover any number of inputs. Since ∂g/∂L is the marginal product of labour and ∂g/∂C is the marginal product of capital, the equation states that the marginal product of labour multiplied by the number of labourers (each of whom is paid this amount) plus the corresponding total payment to capital exactly equals the total product, P.

According to Paul Samuelson, whether there will any profits or surplus for the entrepreneur depends or market conditions. If, for instance, we consider a situation of perfect competition, in the long-run prices of inputs and outputs will settle towards levels at which there is nothing left over for payment to the entrepreneur in excess of his managerial wages and interest on his capital. There will be a profit in excess of this amount only if there is monopoly.

Eulers theorem for Managerial Economics Mcom Delhi University


Eulers theorem for Managerial Economics Mcom Delhi University

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