Principle of time perspective
Principle of time perspective:
“a decision by the firm should take into account of both short-run and long-run effects on revenues and cost & maintain the right balance between the long run and short run.
According to the principle of time perspective, a manger/decision maker should give due emphasis, both to short-term and long-term impact of his decisions, giving apt significance to the different time periods before reaching any decision. Short-run refers to a time period in which some factors are fixed while others are variable. The production can be increased by increasing the quantity of variable factors.
While long-run is a time period in which all factors of production can become variable. Entry and exit of seller firms can take place easily. From consumers point of view, short-run refers to a period in which they respond to the changes in price, given the taste and preferences of the consumers, while long-run is a time period in which the consumers have enough time to respond to price changes by varying their tastes and preferences.
Eg: ABC is a firm engaged in continuous production of X commodities (long run). In the production process, it is having daily an ideal time (free time) for few hours. In that ideal time, firm can take an order for manufacturing other similar goods instead of wasting time. By manufacturing goods in the ideal time firm does not incur any extra fixed cost like (salaries, wages and rent and) because it is constant. So the fixed cost is absent in the production which is done in the ideal time. Generally in production of goods, fixed and variable cost (raw material & labour) is present. However, here the production made in the ideal time, fixed cost is absent. This shows the cost is reduced in production that is made in the ideal time. Investment made in the business can also be recovered very quickly and in short time.
Suppose there is a firm with a temporary idle capacity. An order for 5000 units comes to management’s attention. The customer is willing to pay Rs 4/- unit or Rs.20000/- for the whole lot but not more. The short run incremental cost(ignoring the fixed cost) is only Rs.3/-. There fore the contribution to overhead and profit is Rs.1/- per unit (Rs.5000/- for the lot)Analysis:From the above example the following long run repercussion of the order is to be taken into account:
If the management commits itself with too much of business at lower price or with a small contribution it will not have sufficient capacity to take up business with higher contribution.
If the other customers come to know about this low price, they may demand a similar low price.Such customers may complain of being treated unfairly and feel discriminated against.
In the above example it is therefore important to give due consideration to the time perspectives. “a decision should take into account both the short run and long run effects on revenues and costs and maintain the right balance between long run and short run perspective”.
Here the principle of time perspective applies, where maintains right balance between long run and short-run markets.