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Unformatted text preview: FUNDAMENTALS OF FUNDAMENTALS MANAGERIAL MANAGERIAL ECONOMICS ECONOMICS 9th Edition By Mark Hirschey Basic Economic Relations Relations Chapter 2 Chapter 2 OVERVIEW l l l l l Economic Optimization Process Revenue Relations Cost Relations Profit Relations Incremental Concept in Economic Analysis Economic optimal decision l spreadsheet l Equation l dependent variable l independent variable l marginal revenue l revenue maximization l cost functions l short-run cost functions l long-run cost functions l short run l long run l total costs l Chapter 2 Chapter KEY CONCEPTS fixed costs l variable costs variable l marginal cost l average cost l average cost minimization l total profit total l marginal profit l profit maximization rule l breakeven points l incremental change l incremental profit l breakeven point l average cost minimization l multivariate optimization l constrained optimization l Lagrangian technique l Lagrangian multiplier, λ l Economic Optimization Process Process l Optimal Decisions l Best decision produces the result most consistent with managerial most objectives. l Maximizing the Value of the Firm Firm l l Greed vs. Self-interest l Produce what customers want. l Meet customer needs efficiently. Self-indulgence leads to failure. l Customer focus leads to mutual benefit. benefit. l Price and Total Revenue l Revenue Relations l Marginal Revenue l Total Revenue = Price × Quantity. Total Change in total revenue associated with a one-unit change in output. one unit Quantity with highest revenue, MR = 0. Quantity Inefficiency and waste lead to failure. l Revenue Maximization l l Do Firms Really Optimize? l l Optimization techniques are widely employed by successful firms. employed l Total Cost l Cost Relations l Marginal and Average Cost l Total Cost = Fixed Cost + Variable Cost. l Average Cost Minimization l Marginal cost is the change in total cost associated with a one-unit change in associated output. output. l Average Cost = Total Cost/Quantity Average cost is minimized when MC = AC. AC. l Reflects efficient production of a given output level. output l Total and Marginal Profit l Profit Relations Total Profit (π ) = Total Revenue - Total l Profit Maximization l Cost. Cost. l Marginal profit is the change in total profit due to a one-unit change in output, Mπ = Mπ MR - MC. MR Profit is maximized when Mπ = MR – MC Profit Mπ = 0 or MR = MC, assuming profit MR declines as Q rises. declines l Marginal v. Incremental Profits l Marginal profit is the gain from producing one more unit of output (Q). one l Incremental profit is gain tied to a managerial decision, possibly involving managerial multiple units of Q. ...
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