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ECONOMICS FOR MANAGERS

ECONOMICS FOR MANAGERS. By Mark Hirschey. Basics of Economic Analysis. Chapter 2. Chapter 2 OVERVIEW. 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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ECONOMICS FOR MANAGERS

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  1. ECONOMICSFOR MANAGERS By Mark Hirschey

  2. Basics of Economic Analysis Chapter 2

  3. Chapter 2OVERVIEW • Economic Optimization Process • Expressing Economic Relations • Marginals as the Derivatives of Functions • Marginal Analysis in Decision Making • Incremental Concept in Economic Analysis

  4. 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 Chapter 2KEY CONCEPTS

  5. 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?

  6. 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.

  7. 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)

  8. 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.

  9. 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.

  10. 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.

  11. 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

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