032428893X_47752.ppt

MANAGERIAL ECONOMICS 11th Edition By Mark Hirschey Economic Optimization Chapter 2 Chapter 2OVERVIEW Economic Optimization Process Expressing Economic Relations Marginals as the Derivatives of Functions Marginal Analysis in Decision Making Incremental Concept in Economic Analysis 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, λ 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? 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. 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. 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. 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