Scribd
Upload
12 views13 pages

Managerial Economics Lecture3-1

Uploaded by

iddyhilary10
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
12 views13 pages

Managerial Economics Lecture3-1

Uploaded by

iddyhilary10
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
You are on page 1/ 13

MANAGERIAL ECONOMICS

LECTURE 3:
BASIC TOOLS OF ANALYSIS AND OPTIMIZATION
TECHNIQUES
Dr. Zacharia Elias – Department of Economics
IFM
 Optimization Technique involves technique of:
 maximizing total revenue
 techniques of optimizing output &minimizing average
cost
 maximization of profit function
Basic Tools of Economic Analysis
 Functional relationships between economic
variables
 Some important economic functions
 Slope and its use in economic analysis
 Derivatives of various functions
 Optimization techniques
 Constrained optimization
Source: Managerial Economics: D N Dwivedi, 7th Edition
Source: Managerial Economics: D N Dwivedi, 7th Edition
Linear & Non-linear Functions
 Linear function – change in dependent variable
remains constant throughout for one unit change in
independent variable.
 Qx = 20 – 2Px
 Linear demand function is a straight line.
 Non-linear Demand Function – quantitative
relation between dependent and independent
variables does not remain constant.
 Dx = aPx-b
 Generates curvilinear demand curve.
Linear & Non-linear Functions

Px Dx - Dx – Non
Linear linear
1 18 32.00

2 16 8.00

3 14 3.50

4 12 2.00

5 10 1.33

6 8 0.90
The Concept of Slope
 Slope represents a measurement of the relationship
between marginal changes in two related variables.
 A rate of change in dependent variable as a result
of change in independent variable(s).
 Slope shows how strong or weak a relationship
between two variables is.
 The steeper the curve or line, the weaker the
relationship
 The flatter the curve or line, the stronger the
relationship
Technique of Differential Calculus
 Derivative – a measure of marginal change between
dependent and independent variables.
 A measure of Slope!

 Differential calculus – one of the techniques used in


determining the optimal/ desired target: cost,
revenue, profit etc.

 The derivative of a dependent variable (Y) is the


limit of change in Y when the change in the
independent variable (X) approaches zero.
Source: Managerial Economics: D N Dwivedi, 7th Edition
Substitution Technique
 Technique applied to the problem of profit maximization
and cost minimization
 For profit maximization:
 One variable is expressed in terms of the other and a
constrained equation solved to obtain the value of one variable
 The value obtained is then substituted in the objective function
 For cost minimization:
 Constrained equation is expressed in terms of any of the two
goods or variables
 The equation obtained is then substituted in the objective
function
Optimization Using Calculus
 If Y=f(x), the maxima or minima of Y exists for
that value of X where
 First derivative, dy/dx = 0
 The second and sufficient condition for maxima or
minima is
 For maxima, 2nd derivative should be negative i.e.
d2y/dx2 < 0 at x=x*
 For minima, 2nd derivative should be positive i.e.
d2y/dx2 > 0 at x=x*
Example: Maximize R=60Q-2Q2
 Here dR/dQ = 60 – 4Q
 (dR/dQ is basically MR)
 For maxima or minima dR/dQ = 0
 Or 60-4Q=0 i.e. Q*=60/4 = 15
 2nd derivative, d2R/dQ2 = -4 < 0 therefore maximum of
R exist at Q=15

 The maximum revenue, Rmax = 60xQ*-2Q2= 450 at


15 units of output.

You might also like