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MANAGERIAL CONOMICS

MANAGERIAL CONOMICS. Chapter 2 Economic Optimization. Chapter 2 OVERVIEW. Economic Optimization Process Revenue Relations Cost Relations Profit Relations Incremental Concept in Economic Analysis.

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MANAGERIAL CONOMICS

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  1. MANAGERIAL CONOMICS Chapter 2 Economic Optimization

  2. Chapter 2OVERVIEW Economic Optimization Process Revenue Relations Cost Relations Profit Relations Incremental Concept in Economic Analysis

  3. Managers make tough choices that involve benefits and costs. Effective managers must collect, organize, and process a vast assortment of relevant operating information. However, efficient information processing requires more than electronic computing capability; it requires a fundamental understanding of basic economic relations.

  4. Economic Optimization Process Optimal Decisions Best decision produces the result most consistent with managerial objectives. The primary objective of management is to maximize the value of the firm. Produce what customers want. Meet customer needs efficiently.

  5. Marginal • A marginal is the change in the dependent variable caused by a 1-unit change in an independent variable. • Marginal revenue • the change in total revenue associated with a 1-unit change in output. • Marginal cost • Marginal profit

  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.

  7. $ TR Q

  8. 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

  9. THE VARIOUS MEASURES OF COST Costs of production may be divided intofixed costsand variable costs. Fixed costs are those costs that do not vary with the quantity of output produced. Variable costs are those costs that do vary with the quantity of output produced.

  10. Fixed and Variable Costs Total Costs Total Fixed Costs (TFC) Total Variable Costs (TVC) Total Costs (TC) TC = TFC + TVC

  11. Fixed and Variable Costs Average Costs Average costs can be determined by dividing the firm’s costs by the quantity of output it produces. The average cost is the cost of each typical unit of product.

  12. Fixed and Variable Costs Average Costs Average Fixed Costs (AFC) Average Variable Costs (AVC) Average Total Costs (ATC) ATC = AFC + AVC

  13. Average and Marginal Costs

  14. Average and Marginal Costs Marginal Cost Marginal cost (MC) measures the increase in total cost that arises from an extra unit of production. Marginal cost helps answer the following question: How much does it cost to produce an additional unit of output?

  15. Average and Marginal Cost

  16. $ TC Q

  17. 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.

  18. 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.

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