Managerial Economics

Managerial Economics Chapter no.2 Economic optimization Presented to: DR. Asmat Ullah Presented by: Waqas Ayub

Economic Optimization 



The process of arriving at best solution to an economic problem when alternative courses of action are available. Arriving at the best managerial decision is the goal of economic optimization

Optimal Decision Making Choice alternative that produces result most consistent with managerial objectives characterizing the desirability of decision alternative in terms of the objectives of the organization.  Steps for optimization problem  Important economic relation must be expressed in analytical terms.  Various optimization techniques must be applied to determine the best or, optimal solution in the light of managerial objectives

Objectives of Economic Optimization  

Resource maximization (revenues) Maximizing the value of firm.

Alternative courses of action for economic optimization.  Reduce of inputs  Enhance quality of outputs. • Number of defects like to decrease. • Resources dedicated to working flawed output decreased

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    • • • • •

Organization is able to produce more units with fewer resources. Follow the increase in product demand. Increase managerial staff or line personnel. Cost benefit analysis. Application of economic analysis. Laws of production Theory of consumer behavior. Theory of firm. Theory of market structure and pricing. Laws of marginal product, cost and profit.

Through information Technology • Internet service • Tables • Spreadsheets • Statistical application • Graphs • equations.  Adverstitsing 

Economic Functional relation 

Easiest way to examine basic economic concepts. Functional relations are defined between economic variables. TR = f (Q) TR = R * Q TR = $1.50 * Q Total revenue

Output

$1.50 3.00 4.50 6.00 7.50 9.00

1 2 3 4 5 6

TR = $1.50 * Q Revenue per time period ($)

9 8 7 6 5 4 Total revenue = $1.50 × output

3 2 1 0

1

3 4 5 6 7 8 2 Output per time period (units)

9

Total, average and marginal cost and profit relation  



Total revenue is the total income earned against total no. of units sold. Average revenue per unit is derived by diving total revenue by total no. of units sold. Marginal revenue change in total revenue associated with a one-unit change in output.

$ per time period

Total cost (TC)

Total revenue (TR) Marginal cost (MC) Marginal revenue (MR) QA

QB

Marginal As a Derivative of the Function Derivative a powerful technique of differential calculus can be used to locate minimum or maximum values of the object. Marginal value is the change in dependent variable associated with one-unit change in independent variable. Marginal Y = ∆Y/∆X 

Marginal analysis in decision making     

Finding minimums or maximums Distinguishing minimums from maximums Break-even point Revenue maximization Average cost minimizing

Graphic Presentation of Managerial Analysis $ per time period

TC

$500 MRat Q = 15

Upper breakeven point

400 Lower breakeven 300 point MCatQ =15

200 100

0

TR

MR=MCatQ =15

MC

MR 6

12 15 18

24

30