Microeconomics Value Maximization Theory

Question: Discuss about theMicroeconomics for Value Maximization Theory. Answer: Value maximization theory belongs to the neo classical theory of the firm, according to which every firm must aim at maximising their total market value, thereby maximising social welfare as a result (Baumol and Blinder 2015). This theory is completely dependent upon strong assumptions about the complete markets, perfect information and perfect rationality. In the value maximisation model, the time dimension has been included, which helps in considering the future profit prospects rather than just the current year profits (Nicholson and Snyder 2014). Hence, it provides the firm with the incentive to get a wider and broader perspective of the profits to be earned by the firm. This model helps in undertaking the matters of risk and uncertainty associated with the production process of the firm. It helps in analysing the burden of risk to be shared by the firm depending upon the future profits associated with the future prospects (Rader 2014). Several factors determine the quantity demanded for a particular product. One of the most vital factors that are associated with quantity demanded is its price. Other factors are as follows: Income: the demand for a particular product depends upon the income of the people. Income of a particular product is positively related to the quantities demanded (Varian 2014). With the rise in the income of the consumer, there is a rise in the demand for normal goods in the economy. Tastes and preferences: one of the important factors that determine the demand for the goods and services are the tastes and preferences of the consumer. If the consumer prefers a particular product, then its demand would be higher. Related Goods: there are two kinds of related goods, substitutes and complimentary goods. When there is a change in the price of substitute goods, there would be a positive effect on the demand of the goods that is referred. Contradicting, with the change in the price of the complimentary goods, a negative effect would be perceived with regards to the change in quantity demanded of the referred good (Mahanty 2014). Expectation of Future Prices: based on the expectations of future prices, there is a direct effect on the quantity demanded. It the consumers expect a further rise in the price of the product, and then they would increase their current consumption. Conversely, with the expectation of future fall in the price of the product, they would reduce their current consumption. Change in the quantity demanded of a particular product represents a movement along the demand curve. In this context, the quantity demanded of the particular product would be affected due to change in price, while other factors remaining constant. One the other hand, changes in demand represents the shift of the demand curve. In this context, the change in the demand of a particular product is due to change in any other determinants of demand, except its price. According to the law of diminishing returns, in a production process, with an increase in the one variable input, there would be a resultant fall in the marginal per unit output, all the other factors remaining constant (Postlewaite 2016). It could be said that the additional output gained by increasing one unit of the variable input would be eventually smaller than the additional output gained during the earlier increment of the variable input. Figure 1: Diminishing Marginal Returns (Source: As Created by the Author) In figure 1, the total product curve that is illustrated has an upward sloping curve initially, which is followed by a diminishing returns phase as pointed in the figure. Before the diminishing returns phase, the firm would experience increasing returns where the output would rise at a greater rate than the increase in variable input. In the diminishing returns phase, there would be a fall in the rate of increase of the output. Law of diminishing marginal returns helps in analysing the optimum variable input to be used thereby to produce the maximum output. It gets quite easier to analyse the capita-labour ratio with respect to the productive policies associated with the company. In the field of economics, the span of time in which production takes place in the economy is termed as either short run or long run. Depending upon its specific attributes, each production is associated with a particular span of time. Short run is considered as short span of time, among which the variables are either fixed or variable in nature. In the long run, all the variables that are used as inputs for production are variable in nature. Hence, the costs that are associated with the production produces in both short run and long run are quite different from each other. Short run costs consists of fixed and variables costs both. Fixed costs are incurred at the initiation of the production process, whereas, the variable costs are change with the change in output. The increase or decrease in the cost of short run is associated with the changes in the variable costs, whereas, the fixed costs is constant. Long run costs consist of only the variable costs incurred during the production process, as all the factors of production are variable in nature. There are no fixed factors of production in such a prediction process. The land labour capita and other factors all change with the change in output. Price discrimination is considered as one of key attributes of the monopolist. Under a monopoly form of market, the monopolist analyses some market power, which provides him with the opportunity to discriminate prices among different customers (Nicholson and Snyder 2014). If the market conditions fulfil the necessary criteria then price discrimination is possible to be practised by the monopolist. There are several advantages for a monopolist with regards to such pricing strategy. They would be able to raise their revenue level. They would be able to use their increased revenue for research and development categories. A two-part tariff is a form of price discrimination technique that is practised by the monopolists. In these kinds of price discrimination, the price of the product or service provided by the firm is composed of two parts (Varian 2014). One part is the lump sum fee whereas the second part is the per unit charge. This kind of price discrimination helps the consumers in enabling more consumer surplus. Hence, in such a scenario, the demand for such products would be more for the firm and would thereby allow them to gain more revenue. Reference Baumol, W.J. and Blinder, A.S., 2015.Microeconomics: Principles and policy. Cengage Learning. Mahanty, A.K., 2014.Intermediate microeconomics with applications. Academic Press. Nicholson, W. and Snyder, C., 2014.Intermediate microeconomics and its application. Nelson Education. Nicholson, W. and Snyder, C., 2014.Intermediate microeconomics and its application. Nelson Education. Postlewaite, A., 2016. Report of the Editor: American Economic Journal: Microeconomics.American Economic Review,106(5), pp.736-39. Rader, T., 2014.Theory of microeconomics. Academic Press. Varian, H.R., 2014.Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton Company. Varian, H.R., 2014.Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton Company.