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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 shortrun cost functions l longrun 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. Selfinterest
l Produce what customers want. l Meet customer needs efficiently. Selfindulgence 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 oneunit 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 oneunit 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 oneunit 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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 Spring '10
 Dr.LEITER
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