Again, this is an attempt to breakdown minor parts of my reading for my EMBA. I hope some of this is interesting for you if not…. sorry! I will aim to come back, revisit and flesh out parts of this blog post in the future.
So that we can build economic theories and strategies, we must assume that all consumers are rational. By this we mean that consumers will always aim to further their utility (satisfaction) when they spend their hard earned cash. Without this assumption it would be impossible to build comprehensive economic theories, although we do understand that in reality consumers do not always act this way. Consumers can be brash and unexpected in their decision making process. This is something that cannot be predicted, and is so ignored.
Consumers are understood to increase ‘utility’ from their purchases, and by this we mean that they aim to increase their satisfaction through spending.
Marginal Utility – This is known to be the amount by which a consumers’ utility changes when the consumption changes by one unit.
Marginal Product – This is understood to be the change of total product when the change of input used alters by one unit.
Marginal Revenue – The amount of change in revenue caused from increasing the quantity sold by one unit.
Marginal Cost – This is seen as the change in cost resulting from increasing the quantity produced by one unit.
Again, it is accepted that traditional business decisions are based on ‘Profit Maximisation’. We do comprehend that there are perhaps others reasons why managers might make decisions, such as pier appraisal, personal commission income, social and ethical reasons, plus many others. But once again, so that we can build comprehensive economic theories we must assume that profit is the over-riding factor when making decisions. Increasing the shareholder value is seen as the primary reason to further profit, and this can be done by increasing dividend payments and increasing share price.
When managers make decisions there is always thought paid to the ‘Time Dimension’. The concept of time is an important factor for decisions and their outcome. It is obvious that some decisions may very well generate a ‘quick buck’ but may have damaging effects for the local community or for the longevity of the business. When making decisions both the following terms should be understood.
Short Run – This is the operating period of a business when at least one factor of production is fixed in supply.
Long Run – This is the operating period, or planning horizon, in which all the factors of production may be varied in any direction.