Question

In: Economics

a) What is the distinction between the short run and the long run? In reality, does...

a) What is the distinction between the short run and the long run? In reality, does a company operate in the short run or in the long run? How do you know? Is it a reasonable distinction to have for a company?

b) With respect to profit and loss, what is the economic goal of business? How does maximizing profits accomplish that goal? What should, in your opinion, be the goal of a business?

Solutions

Expert Solution

Answer:-

(A). The short run is a situation where some factors of production are fixed and some are variable. But in the long run, all the factors are variable.

Yes, in reality, a company operates in the short run or long run. In a perfectly competitive market, if the firm operates in the short run, it can make the positive economic profit, economic loss or normal profit. But in the long run, it earns the only normal profit.

Yes, it is a reasonable distinction. Because if a company wants to increase its scale of operation, it is only possible in the long run.

(B). Business owners who are rational and self-interested always work for a profit motive. Profits are the driving force behind every business venture.

Accounting profit is the difference between total revenue and accounting cost, the latter containing only the explicit cost incurred. Economic profit is the difference between total revenue and total opportunity cost, the latter containing both the explicit cost and the implicit cost incurred. The inclusion of opportunity cost in the computation of economic profit indicates that, though the accounting profit is highly positive, the economic profit can be positive zero or even negative when the opportunity costs are added. The decisions of business should thus, be based on economic cost and not on the accounting costs.

Businesses nowadays do not prefer to maximize profit but to maximize sales revenue for a substantial amount of profit. With changing dynamics of the market, this new goal of businesses is highly appreciable.


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