Question

Analysis of long run and short run affects of decisions on revenue as well as costs is based on which principle?
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Answer 1

In economics the long run is a theoretical concept in which all markets are in equilibrium, and all prices and quantities have fully adjusted and are in equilibrium. The long run contrasts with the short run, in which there are some constraints and markets are not fully in equilibrium.

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Answer 2

Answer:

Principle of time perspective

Explanation:

Principle of time perspective-

The principle of temporal perspective can be defined as follows: "A choice should maintain the appropriate balance between the long-run and short-run perspectives and take into account both the short-run and long-run effects on revenues and costs."

Let us understand this with the help of an illustration-

Consider a company that has temporary idle capacity. A 5,000 unit order is brought to management's attention. The purchaser will pay no more than $4.00 per unit or $20,000 for the entire lot. Only $3.00 is the short-term incremental cost (fixed cost excluded). As a result, each unit's contribution to overhead and profit is $1 ($5,000 for the lot).

However, the following are some long-term effects of the sequence that should be considered:

• The management may not have the capacity to take on business with bigger contributions when the opportunity presents itself if it commits to too much business at lower pricing or with a modest contribution. The management may be forced to think about increasing capacity, and under such circumstances, even the so-called fixed costs may change.
• Any particular group of customers may demand a comparable low price if they learn about this cheap pricing. These clients may allege that they were discriminated against and treated unfairly. As a result, they might decide to buy from producers who have more reasonable price policies. The company's reputation among its customers may suffer from the price cuts made in the event of oversupply, which will have an impact on sales.

Hence, from the above discussion we can infer that analysis of long run and short run affects of decisions on revenue as well as costs is based on the principle of time perspective.

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