Types of Costs in Short Run Vs. Long Run
In the short run some inputs cannot be changed (There some fixed cost). So, we can see two major types…
diminishing retuns
Diminishing returns
After a certain level of the output, a firm should utilize more variable inputs with fixed amount of inputs to produce an additional unit of output. This is called diminishing returns. There are few reasons can effect to the diminishing returns of a company. They are, fixed cost, lower level of productivity, lower demand, impact of working environment and so on.
Because of above reasons, company has faced diminishing returns and marginal cost (MC) curve shaped as follows.
Is there anyway to avoid diminishing returns?
There is no way to avoid them in the short run. Because, diminishing returns are definitely occurred in the short run, after a certain point of production. So, Microsoft Company only can get self-managed decisions to align with the optimum output level. Here optimum output level means where profit is maximized in the short run for a company. Company can decide this output level according to the cost and revenue predictions of the company. In other words, Microsoft company should do profit analysis. Because profit equals to revenue minus cost. Also, a company can calculate the profit maximization point, using MC and MR analysis. A business organization earns maximum profit where MC (Marginal cost) equals to MR (Marginal revenue). So, profit maximization rule for the a company is also MC = MR.