Professional Documents
Culture Documents
Optimization Techniques
and New Management Tools
Model
a framework based on simplifying assumptions
Î it helps to organize our economic thinking
based on a simplified picture of reality
Î We focus on key elements
Data
the economist’s link with the real world
1. time series
2. cross section
Price
Year Price Quantity
1 6.0 100
3 6.0 90
X X
4 6.5 85
X X
5 6.0 87 6.0 X (6.0, 100)
X
6 7.0 80
7 6.5 88
80 100
Quantity
Managerial Economics DR. SAVVAS C SAVVIDES 5
Economic Models: An Example
Examples:
1. Quantity of CDs demanded depend on
(or is a function of):
Î f (Prices, income, preferences)
2. Revenues are a function of Sales:
Î f (Q)
250
Graphs: 200
150
100
50
0
0 1 2 3 4 5 6 7
AC = TC/Q
Q TC AC MC
e.g. for Q=3 0 20 - -
ÎAC = 180/3 =60 1 140 140 120
2 160 80 20
MC = ∆TC/∆Q 3 180 60 20
For ∆Q from 3 to 4: 4 240 60 60
ÎMC = (240-180)/(4-3) 5 480 96 240
=60 / 1 = 60
Managerial Economics DR. SAVVAS C SAVVIDES 9
Total, Average, & Marginal Cost
TC
TC ($)
240
180
120
60
0
0 1 2 3 4
Q
AC, MC ($)
MC
120
AC
60
0
0 1 2 3 4 Q
($) 300 TC
TR
240
180
120
60
0 Q
0 1 2 3 4 5
60
30
0
-30 Profit
-60
Price
Quantity
Slope of TR at B is negative
Î Slope of tangency at pt. B
A B
TR
Quantity
Managerial Economics DR. SAVVAS C SAVVIDES 15
Concept of the Derivative (1)
dY ∆Y
= lim
dX ∆X → 0 ∆ X
10 Y = 10
X
Managerial Economics DR. SAVVAS C SAVVIDES 19
Rules of Differentiation
Example: Y = 3X2
Derivative: Î dY/dX = 2 * 3X2-1
Î = 6X
Managerial Economics DR. SAVVAS C SAVVIDES 20
Power Function --Example
TR
300
Graphs: 250
200 TR
150
100
50
0
0 1 2 3 4 5 6 7
MR Q
dY dU dV
= ±
dX dX dX
dY dV dU
=U +V
dX dX dX
dY
=
(
V dU
dX ) (
− U dV
dX )
2
dX V
Managerial Economics DR. SAVVAS C SAVVIDES 24
Rules of Differentiation
Y = f (U ) U = g( X )
dY dY dU
= ⋅
dX dU dX
250
TR
200
150
100
50
0
0 1 2 3 4 5 6 7
Q
MR = dTR/dQ = 100 – 20Q = 0 MR
20Q = 100
Q=5
Managerial Economics DR. SAVVAS C SAVVIDES 27
Optimization With Calculus (2)
To distinguish between a max and a min, we
use the second derivative.
Second derivative rules:
If d2Y/dX2 > 0 (positive), then X is a minimum.
If d2Y/dX2 < 0 (negative), then X is a maximum.
In the example, we found d(TR) / dQ = 100 – 20Q
Îd2(TR)/dQ2 = - 20 (negative)
Therefore, we know that the TR function is at a
maximum (“top of the hill”) at Q = 5
Managerial Economics DR. SAVVAS C SAVVIDES 28
Multivariate Optimization
Multivariate functions:
TR = f (Sales, Advertising, prices, …)
TC = f ( wages, interest, raw materials, …)
Demand = f (price, income, P of substitutes, …)