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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
• 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 1
3.00 2
4.50 3
6.00 4
7.50 5
9.00 6
TR = $1.50 * Q
Revenue per
9
time period ($)
8

3 Total revenue = $1.50 × output

0 1 2 3 4 5 6 7 8 9
Output per time period (units)
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
$ per time Analysis
period
TC
$500
MRat Q = 15
400 Upper breakeven point
Lower
breakeven TR
300 point

200 MCatQ =15


MC
MR=MCatQ =15
100
MR

0 6 12 15 18 24 30