The economic concepts of the long run and the short run have become part of everyday language. Managerial economists are also concerned with the short-run and long-run effects of decisions on revenues as well as on costs. The actual problem in decision-making is to maintain the right balance between the long-run and short-run considerations. A decision may be made on the basis of short-run considerations, but may in the course of time offer long-run repercussions, which make it more or less profitable than it appeared at first. An illustration will make this point clear. Suppose there is a firm with temporary idle capacity. An order for 5,000 units comes to management’s attention. The customer is willing to pay 4.00 $ per unit or 20,000 $ for the whole lot but not more. The short-run incremental cost (ignoring the fixed cost) is only 3.00 $. Therefore, the contribution to overhead and Continue reading
Economics Basics
Pricing under Different Market Structures
Price-fixation is an important managerial function in all business enterprises. If the price set is quite high, the seller may not find enough number of consumers to buy his product. If the price fixed is too low, the seller may not be able to cover his cost. Thus, fixing appropriate price is a major decision-taking function of any enterprise. Price-decisions, no doubt, need to be reviewed from time to time. Market Structures and Pricing Decisions A firm operates in a market and not in isolation. Under Perfect Competition price is determined by the forces of demand and supply. The point of intersection between demand and supply curves is the point of equilibrium which determines the equilibrium price. Each firm under perfect competition is a price taker and not a price maker. The Average Revenue Curve of a firm under perfect competition is horizontal and that AR = MR. Further there Continue reading
Elasticity of Demand – Factors, Types and Importance
Elasticity is a term that was initially developed by known economic scholar called Alfred Marshall, and has been since used in measuring the relationship that exists between product price and its quantity demanded. It typically followed the law of demand that states that the lower the price of goods and services, the higher the quantity that will be demanded of such goods and services i.e. it primarily explains only the actual directions of changes in the demand for the commodity, but not really explaining the extent of that change. A further development on these lapses led to the concept of elasticity of demands. In practical term, elasticity means the act of responsiveness. Meanwhile, elasticity of demand has been theoretically defined as the responsiveness of the actual quantity demanded of a product to the change in its actual price. Elasticity of demand could be defined as the measure of the degree Continue reading
The Micro Economics and Macro Economics
Economic analysis is of two types (a) Micro economic analysis and (b) Macro economic analysis Definition and Meaning of Micro Economics: According to E. Boulding, “Micro economics is the study of particular firm, particular household, individual price, wage, income, industry, and particular commodity.” In the words of Leftwitch, “Micro economics is concerned with the economic activities of such economic units as consumers, resource owners and business firms.” ‘Micro’ is a Greek word means ‘small’. Micro economic theory studies the behavior of individual decision-making units such as consumers’ resource owners, business firms, individual households, wages of workers, etc. It studies the flow of economic resources or factors of production from the resource owners to business firms and the flow of goods and services from the business firms to households. It studies the composition of such flows and how the prices of goods and services in the flow are determined. In this Continue reading
Revenue Structure of a Firm under Monopoly
Monopoly is that market category in which a single seller dominates the market. There is only one producer (firm) and there are no substitutes for its product. Since under monopoly there is just one firm producing a particular product there is no element of competition. Besides in the absence of any other firm producing homogeneous product the firm itself constitutes the industry. Hence it is futile to make any effort to distinguish between a firm and an industry under monopoly. Under Monopoly, firm is itself an industry. The revenue structure under monopoly is bound to be different from that in case of a firm under perfect competition. Under perfect competition, the firm is a price-taker and not a price maker and its AR curve is horizontal denoted by perfectly elastic demand curve. But a monopolist is not a price-taker; he is price-maker. Continue reading
The Principle of Equity in Taxation
Taxation traces its origin to the ancient times as a major source of revenue needed for governance. Kingdoms, monarchies and even dynasties had an elaborate form of taxation imposed on their subjects to source funds that were used to run affairs of the government. These taxes were subjective and biased depending on those in power. Advancement in education led to important studies on the possible forms of taxation that reflected the aspirations and welfare of the people. Owing to this therefore, Adam Smith, accredited as the “Father of modern political Economy” carried out an extensive study in Public Finance seeking to give an in-depth analysis of taxation. Smith documented the findings in his book known as “Wealth of Nations” in 1776. It is in this book that Smith scripted the four maxims of taxation which were later globally adopted as the Canons of Taxation which are summarized as Equity, Certainty, Continue reading