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Chapter 3 Optimisation Techniques

The document discusses various optimization techniques including: 1. Methods for maximizing or minimizing objective functions like profit maximization. 2. Expressing economic relationships through equations, tables, and graphs. 3. The relationship between total, average, and marginal cost being important in optimization analysis. 4. Concepts of derivatives, rules of differentiation, and optimization using calculus. 5. New management tools for optimization like benchmarking, total quality management, and reengineering.

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63 views9 pages

Chapter 3 Optimisation Techniques

The document discusses various optimization techniques including: 1. Methods for maximizing or minimizing objective functions like profit maximization. 2. Expressing economic relationships through equations, tables, and graphs. 3. The relationship between total, average, and marginal cost being important in optimization analysis. 4. Concepts of derivatives, rules of differentiation, and optimization using calculus. 5. New management tools for optimization like benchmarking, total quality management, and reengineering.

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abc
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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11-08-2020

Ch-3: Optimization
Techniques

Optimization Techniques
• Methods for maximizing or minimizing
an objective function
• Examples
– Consumers maximize utility by purchasing
an optimal combination of goods
– Firms maximize profit by producing and
selling an optimal quantity of goods
– Firms minimize their cost of production by
using an optimal combination of inputs

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11-08-2020

Expressing Economic Relationships

Equations: TR = 100Q - 10Q2

Tables: Q
TR
0
0
1
90
2
160
3
210
4
240
5
250
6
240

Graphs:

Total, Average, and Marginal Cost


The relationship between Total, Average, and Marginal
Cost is important in optimisation analysis.
Table shows a hypothetical example of relation ship
between output(Q) and Cost(C)

Q TC AC MC
AC = TC/Q 0 20 - -
1 140 140 120
MC = TC/Q 2 160 80 20
3 180 60 20
4 240 60 60
5 480 96 240

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11-08-2020

Total, Average, and


Marginal Cost

Profit Maximization

Q TR TC Profit
0 0 20 -20
1 90 140 -50
2 160 160 0
3 210 180 30
4 240 240 0
5 250 480 -230

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Profit Maximization

Steps in Optimization
• Define an objective mathematically as a
function of one or more decision variables.
• Define one or more constraints on the
values of the objective function and/or the
decision variables.
• Determine the values of the decision
variables that maximize or minimize the
objective function while satisfying all of the
constraints.

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Concept of the Derivative

The derivative of Y with respect to X is


equal to the limit of the ratio Y/X as
X approaches zero.

dY Y
 lim
dX X 0 X

Rules of Differentiation
Constant Function Rule: The derivative
of a constant, Y = f(X) = a, is zero for all
values of a (the constant).

Y  f (X )  a

dY
0
dX

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11-08-2020

Rules of Differentiation
Power Function Rule: The derivative of
a power function, where a and b are
constants, is defined as follows.

Y  f (X )  aX b

dY
 b  a X b 1
dX

Rules of Differentiation
Sum-and-Differences Rule: The derivative
of the sum or difference of two functions
U and V, is defined as follows.
U  g( X ) V  h( X ) Y  U V

dY dU dV
 
dX dX dX

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11-08-2020

Rules of Differentiation
Product Rule: The derivative of the
product of two functions U and V, is
defined as follows.
U  g( X ) V  h( X ) Y  U V

dY dV dU
U V
dX dX dX

Rules of Differentiation
Quotient Rule: The derivative of the
ratio of two functions U and V, is
defined as follows.
U
U  g( X ) V  h( X ) Y
V

dY V

 dU dX   U  dV dX 
2
dX V

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Rules of Differentiation
Chain Rule: The derivative of a function
that is a function of X is defined as follows.

Y  f (U ) U  g( X )

dY dY dU
 
dX dU dX

Optimization With Calculus

Given, Y = f(X)
Find X such that dY/dX = 0
Second derivative rules:
If d2Y/dX2 > 0, then X is a minimum.
If d2Y/dX2 < 0, then X is a maximum.

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New Management Tools for


Optimisation
1. Benchmarking -
2. Total Quality Management –> “how can we do
this cheaper, better or faster”? It’s about
maximising quality and minimising costs or
constantly improving quality to deliver
increasing value to customers.
3. Reengineering–> seeks to completely
reorganise the firm; if you were to start all over
again, how would you do it?
4. The Learning Organization- continuous
learning- both collective and individual.

Quadratic Formula

b2  4ac

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