Essay Sample on Consumer Theory and Demand

The goal and vision of any firm are to achieve the highest provide levels. Economists argue that profits drive firms towards the creation of better goods that align with the needs of the consumers. This theory helps to know the behavior of consumers in the market (Principles of Microeconomics). Consumers buy goods from a firm because they believe that is the opportunity cost. Therefore, the firm should always strive to attract the consumer's money through the provision of quality goods. To achieve this, knowledge of consumer demand is crucial. Demand is in simple terms is the quantity of goods consumers are willing to buy at a particular price. Each consumer will however tend to purchase goods that satisfy their needs. This idea can be used to establish consumer demand. It is important to note that the preference for a product decreases if it is overused; this is referred to as diminishing marginal utility. This is true in all purchase decisions. This means that in the law of demand, consumers will tend to demand less as the prices go up.

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Law of Demand and Marginal Revenue

A firm is likely to get marginal revenue when they sell more. This is directly related to demand and can be used to know how much to produce. Now to get the marginal revenue, the sum of output and price effect is obtained. In this case, the price effect will be the price reduction of the initial sales. However, of low demand, the firm should limit production increases to avoid a drop in the price of goods.

Product Cost

To control production, the firm must understand the fixed cost-no change in expenses, e.g. rent, and variable cost-change in expenses, e.g. labor. As the production increases, marginal cost decreases; however, the law of diminishing later marginal kicks in increasing the marginal cost. This can be explained in the graph of marginal cost and total cost.

Production and Price Decisions

Now to determine the price and output that maximises profit, the number of goods to produce in determined but only with the knowledge of both marginal revenue and cost. Target costing helps the company to compete primarily in new markets (Needles and Crosson, 2013). Therefore, it is true that the higher the marginal revenue, the higher the profit, hence the maximum profit.

Accounting and Economic Profits

To maximize profits, the choice of the industry is also crucial. However, to fit in a particular industry, two factors are in play, explicit cost expenses that are plowed back to run the business and implicit cost income derived from other sources. In the end, the difference between the total revenue and the cost of a firm gives the economic profit.

Referencing

Principles of Microeconomics. (n.d). Understanding Consumer Theory. https://pressbooks.bccampus.ca/uvicecon103/chapter/6-3-understanding-consumer-theory/

Needles, B., & Crosson, S. (2013). Managerial accounting. Cengage Learning.