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MANAGERIAL ECONOMICS 12 th Edition

MANAGERIAL ECONOMICS 12 th Edition. By Mark Hirschey. Economic Optimization. Chapter 2. Chapter 2 OVERVIEW. Economic Optimization Process Revenue Relations Cost Relations Profit Relations Incremental Concept in Economic Analysis. optimal decision spreadsheet Equation

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MANAGERIAL ECONOMICS 12 th Edition

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  1. MANAGERIAL ECONOMICS12th Edition By Mark Hirschey © 2009, 2006 South-Western, a part of Cengage Learning

  2. Economic Optimization Chapter 2 © 2009, 2006 South-Western, a part of Cengage Learning

  3. Chapter 2OVERVIEW • Economic Optimization Process • Revenue Relations • Cost Relations • Profit Relations • Incremental Concept in Economic Analysis © 2009, 2006 South-Western, a part of Cengage Learning

  4. optimal decision spreadsheet Equation dependent variable independent variable marginal revenue revenue maximization cost functions short-run cost functions long-run cost functions short run long run total costs fixed costs variable costs marginal cost average cost average cost minimization total profit marginal profit profit maximization rule breakeven points incremental change incremental profit breakeven point average cost minimization Chapter 2KEY CONCEPTS © 2009, 2006 South-Western, a part of Cengage Learning

  5. Economic Optimization Process • Optimal Decisions • Best decision produces the result most consistent with managerial objectives. • Maximizing the Value of the Firm • Produce what customers want. • Meet customer needs efficiently. • Greed vs. Self-interest • Self-indulgence leads to failure. • Customer focus leads to mutual benefit. © 2009, 2006 South-Western, a part of Cengage Learning

  6. Revenue Relations • Price and Total Revenue • Total Revenue = Price  Quantity. • Marginal Revenue • Change in total revenue associated with a one‑unit change in output. • Revenue Maximization • Quantity with highest revenue, MR = 0. • Do Firms Really Optimize? • Inefficiency and waste lead to failure. • Optimization techniques are widely employed by successful firms. © 2009, 2006 South-Western, a part of Cengage Learning

  7. © 2009, 2006 South-Western, a part of Cengage Learning

  8. © 2009, 2006 South-Western, a part of Cengage Learning

  9. Cost Relations • Total Cost • Total Cost = Fixed Cost + Variable Cost. • Marginal and Average Cost • Marginal cost is the change in total cost associated with a one‑unit change in output. • Average Cost = Total Cost/Quantity • Average Cost Minimization • Average cost is minimized when MC = AC. • Reflects efficient production of a given output level. © 2009, 2006 South-Western, a part of Cengage Learning

  10. © 2009, 2006 South-Western, a part of Cengage Learning

  11. Profit Relations • Total and Marginal Profit • Total Profit (π ) = Total Revenue - Total Cost. • Marginal profit is the change in total profit due to a one-unit change in output, Mπ = MR - MC. • Profit Maximization • Profit is maximized when Mπ = MR – MC = 0 or MR = MC, assuming profit declines as Q rises. • Marginal v. Incremental Profits • Marginal profit is the gain from producing one more unit of output (Q). • Incremental profit is gain tied to a managerial decision, possibly involving multiple units of Q. © 2009, 2006 South-Western, a part of Cengage Learning

  12. © 2009, 2006 South-Western, a part of Cengage Learning

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