MANAGERIAL
th
ECONOMICS 11 Edition
By
Mark Hirschey
Economic Optimization
Chapter 2
Chapter 2
OVERVIEW
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Economic Optimization Process
Expressing Economic Relations
Marginals as the Derivatives of Functions
Marginal Analysis in Decision Making
Incremental Concept in Economic Analysis
Chapter 2
KEY CONCEPTS
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optimal decision
table
spreadsheet
graph
equation
dependent variable
independent variable
marginal
marginal revenue
marginal cost
marginal profit
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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
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Optimal Decisions
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Best decision helps achieve objectives most
efficiently.
Maximizing the Value of the Firm
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Value maximization requires serving
customers efficiently.
What do customers want?
 How can customers best be served?
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Expressing Economic Relations
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Tables and Equations
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Simple graphs and tables are useful.
Complex relations require equations.
Total, Average, and Marginal Relations
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Total increases when marginal is positive.
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)
Maximization occurs when
marginal switches from positive to
negative.
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If marginal is above average, average is
rising.
If marginal is below average, average is
falling.
Graphing Total, Marginal, and Average
Relations
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Deriving Totals from Marginal and Average
Curves
Total is sum of marginals.
Marginals as the Derivatives of
Functions
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Concept of a Derivative
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Derivative is a marginal relation.
Derivatives and Slope
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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
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Finding Maximums or Minimums
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Distinguishing Maximums from Minimums
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Maximum and minimum points occur where marginal
is zero.
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
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Maximum profit requires MR = MC.
Incremental Concept in Economic
Analysis
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Marginal v. Incremental Concept
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Marginal relates to one unit of output.
Incremental relates to one managerial
decision.
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Incremental Profits
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Multiple units of output is possible.
Profits tied to a managerial decision.
Incremental Concept Example