Difference between costs in the short run and long run/ Managerial Economics
Answer all the following questions.
1. Outline the importance of value maximization in the theory of the firm
2. Describe how factors, other than price, impact on demand and distinguish between changes in the quantity demanded and changes in demand.
3. Identify the techniques available for collecting data. Explain the different forecasting tools available to managers
4. Explain the law of diminishing returns.
5. Explain the difference between costs in the short run and long run.
6. Describe the key features of the major market structure types.
7. Explain the importance of price discrimination and two- part tariff pricing to a monopolist.
8. Describe the methodology employed in benefit-cost analysis.
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The stakeholder theory states that managers have to take decisions that should consider the interest of all its stakeholders whether they are internal or external. In doing so, there are certain trade offs because the different interests are competing interests and they need to be balanced out. Hence, in this case managers are not accountable for actions taken. Because of these limitations, value maximization is not considered as an organizational objective to create value. As value cannot be created if interest of stakeholders is not taken care of, it encompasses all the terms of the stakeholder theory and also takes cares of the value maximization of the firm in the long run. The theory rightly says that managers should make decisions so that value of the firm increases. Total value of the firm is the combined sum of the financial claims like the debt, stock, warrants and equity. The aim of the firm is to maximize long run profits and shareholder’s wealth.
The diminishing returns is the decrease in the marginal output of the output by marginally increasing one of the factors of production incrementally and keep all other factors of production constant at the same time. The law of diminishing returns states that keeping all other factors constant and increasing one factor of production will at some time result in lower productivity. For example, by increasing the labor in a production will lead to increase in productivity up to some point but beyond that point there will be loss of productivity due to labor unrest, unemployment and other issues. After that point the production technique and other factors of production will remain the same and this eventually affects the efficiency of every worker. To address this issue. The production technology and other factors need to be upgraded as well.
The law of diminishing returns does not state that the output will decrease resulting in negative returns.
