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Mathematical Preliminary and Optimization Theory

The document discusses various quantitative techniques used in managerial economics, including regression analysis, correlation, calculus, and optimization. Optimization, which is the unifying theme, involves finding the inputs that give the best outputs and is used to minimize costs, maximize revenue, locate warehouses to minimize shipment time, and allocate and control design. The document also covers regression analysis, correlation, calculus, and different optimization methods like the closed interval method, first derivative method, and second derivative method.

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Gennelle Birog Navarro
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140 views21 pages

Mathematical Preliminary and Optimization Theory

The document discusses various quantitative techniques used in managerial economics, including regression analysis, correlation, calculus, and optimization. Optimization, which is the unifying theme, involves finding the inputs that give the best outputs and is used to minimize costs, maximize revenue, locate warehouses to minimize shipment time, and allocate and control design. The document also covers regression analysis, correlation, calculus, and different optimization methods like the closed interval method, first derivative method, and second derivative method.

Uploaded by

Gennelle Birog Navarro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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MANAGEMENT ECONOMICS

CHAPTER III

MATHEMATICAL
PRELIMINARY AND
OPTIMIZATION THEORY
Mathematics in Economics

 Mathematical Economics is a model of economics that utilizes math


principle and methods to create economic theories and to investigate
economic quandaries.
 It permits economists to conduct quantifiable test and create models
to predict future economic activity.
 The marriage of statistical methods, mathematics and economic
principles has created an entirely new branch of economics called
econometrics.
Econometrics

 The quantitative application of statistical and mathematical models using data


to develop theories or test existing hypotheses in economics, and in
forecasting future trends from historical data.
 An example:
(Income Effect) An economist may hypothesize that as a person increases
his income, his spending also increases . If the data show that such an
association is present, a regression analysis can be conducted to understand
the strength of the relationship between income and consumption and
whether or not that relationship is statistically significant-that is, it appears
to be unlikely that due to chance alone.
The use of Math in Economics

 Determining how resources are allocated requires a mathematical


understanding of how to calculate those resources , cost of
distribution and assessing other quantitative measures.
 Thus, the field of economics is riddled with mathematical equations
and applications.
Types of Math

 Algebra- used to make computations such as total cost and total


revenue
 Calculus- used to find derivatives of utility curves, profit
maximization curves and growth models.
 Statistics- allows economists to make forecasts and determine the
probability of an occurrence.
Math in Decision-Making

Economists are hired to determine the risk or probable outcome of an


event.
 For example, hospital wants to know what the risks are of dying
from an operation and if the benefits are worth it.
 Another example: Economists working on pharmaceutical
companies make similar math computations to assess if the risk
of taking a drug outweighs its potential benefits.
Benefits

 Economists use their math skills to save money, even in counter-


intuitive ways.
 Economists also use math to determine a business success , even
when some factors are unpredictable.
Limitations

Economists perform mathematical calculations with imperfect


information. Their economic models are rendered useless in times of
natural disasters , union strikes or any other catastrophic event.
Additionally, math can seldom help economists predict irrational
human behavior. A fundamental assumption of economics is that
humans act rationally. However, humans often make irrational
decisions based on fear or love. These two factors cannot be accounted
for in an economic model.
Potential

Economists are revising the way calculations are performed to account


for intangible effects like pollution.
Economists currently do not calculate the effects of rain forest
depletion or water pollution into things like profit maximization or
business costs, for example “The Economics Of The Environment And
Natural Resources “(book by Quentin Grafton and Wiktor
Adamowicz)) explain that economic standards such as GDP are
inadequate in measuring the health of an economy. A new field
emerging called natural resource accounting which attempts to
attribute a dollar value to these costs.
Quantitative techniques used in
managerial economics:

 Regression analysis
 Correlation
 Calculus and
 Optimization(the unifying theme that runs through the most of
managerial economics)of business decisions given the firm’s
objectives and constraints imposed by scarcity(for example)through
the use of operations research , mathematical programming , game
theory and other computational methods.
Regression Analysis

 A set of statistical processes for estimating relationships among


variables.
Dependent variable or criterion variable (changes)
Independent variable or predictors(fixed)
 Widely used for decision making and forecasting
Correlation

 Often refers to how close two variables are to having linear


relationships with each other .
 Familiar examples:
 Correlation between the physical statures of parents and their
offspring
 Correlation of Demand for a limited Supply product and its
Price
Calculus

 Used for counting and calculations


 In economics, calculus allows for the determination of maximal
profit both marginal cost and marginal revenue
Optimization

 Finding maximum or minimum values of a quantity, or finding


when this max/mins occurs.
 Helps find the inputs that give the best outputs
 What quantities are optimized in economics?
 Minimize costs

 Maximize revenue
Optimization

Warehouse Placement

Warehouse Minimize
Location Shipment Time
Optimization

Allocate

Design

Control
Optimization methods to choose
from:

1. Closed interval method


2. 1st derivative method
3. 2nd derivative method
1st Steps in a Optimization Problem:

1. Identify the quantity to be optimized.


2. Identify the feasible domain
Absolute Maximum

y=F(x)

Absolute Minimum

a c1 c2 c3 b
The Closed Interval Method

Suppose f is continuous on some closed, bounded interval [a,b].

 Find the critical points c1,c2,…of f on [a,b].


 Evaluate f at the endpoints a and b , and the critical points.
 The largest of these values will be the absolute max of f; the
smallest will be the absolute min of f on [a,b].
Two final questions to ask:

 Does my answer make sense?


 Did I answer the question asked?

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