MANAGERIAL ECONOMICS 11th Edition

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MANAGERIAL ECONOMICS 11th Edition

• By
• Mark Hirschey

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Economic Optimization

• Chapter 2

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Chapter 2OVERVIEW

• Economic Optimization Process
• Expressing Economic Relations
• Marginals as the Derivatives of Functions
• Marginal Analysis in Decision Making
• Incremental Concept in Economic Analysis

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Chapter 2KEY CONCEPTS

• optimal decision
• table
• spreadsheet
• graph
• equation
• dependent variable
• independent variable
• marginal
• marginal revenue
• marginal cost
• marginal profit

• derivative
• inflection point
• second derivative
• profit maximization
• breakeven point
• revenue maximization
• average cost minimization
• multivariate optimization
• constrained optimization
• Lagrangian technique
• Lagrangian multiplier, ?

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Economic Optimization Process

• Optimal Decisions
• Best decision helps achieve objectives most
  efficiently.
• Maximizing the Value of the Firm
• Value maximization requires serving customers
  efficiently.
• What do customers want?
• How can customers best be served?

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Expressing Economic Relations

• Tables and Equations
• Simple graphs and tables are useful.
• Complex relations require equations.
• Total, Average, and Marginal Relations
• Total increases when marginal is positive.

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Revenue per time period () 9 8 7 6 5 4 3 Total
revenue 1.50 output 2 1 0 1 2 3 4 5 6 7 8 9
Output per time period (units)
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Maximization occurs when marginal switches from
positive to negative.

• If marginal is above average, average is rising.
• If marginal is below average, average is falling.
• Graphing Total, Marginal, and Average Relations
• Deriving Totals from Marginal and Average Curves
• Total is sum of marginals.

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Marginals as the Derivatives of Functions

• Concept of a Derivative
• Derivative is a marginal relation.
• Derivatives and Slope
• Derivative of total revenue is marginal revenue.
• Derivative of total cost is marginal cost.
• Derivative of total profit is marginal profit.

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Marginal Analysis in Decision Making

• Finding Maximums or Minimums
• Maximum and minimum points occur where marginal
  is zero.
• Distinguishing Maximums from Minimums
• Maximum is where first derivative is zero, second
  derivative is negative.
• Minimum is where first derivative is zero, second
  derivative is positive.
• Maximizing the Difference Between Two Functions
• Maximum profit requires MR MC.

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Incremental Concept in Economic Analysis

• Marginal v. Incremental Concept
• Marginal relates to one unit of output.
• Incremental relates to one managerial decision.
• Multiple units of output is possible.
• Incremental Profits
• Profits tied to a managerial decision.
• Incremental Concept Example