2a. Economic Optimisation Process
Optimal Decisions: Best decision produces the result most consistent with managerial objectives
Value maximisation of the firm:
At which output level is:
Variables:
Revenue Maximisation
Produce what customers want
Meet Customer needs efficiently
Revenue Maximised?
Value of the firm is the present value of future profits
Profits are equal to TR - TC
Average Cost Minimised?
Profits Maximised?
Total Revenue
Marginal Revenue
Demand Function: P = f(Q)
Total Cost
Marginal Cost
Average Cost
Total Profit
Marginal Profit
Revenue maximised when TR is highest - inflection point.
Find max by setting the slope (marginal revenue) to zero (MR = 0)
Determine revenue maximising level of output
Use this Q in the remaining calculations for revenue maximisation
Average Cost Minimisation
AC rising
When MC > AC: Cost of an additional unit is greater than the average cost per unit
AC falling
When MC < AC: Cost of an additional unit is lower than the average cost per unit
AC at minimum
When MC = AC
Profit Maximisation
pi rising
When Mpi > 0
pi falling
When Mpi < 0
pi at maximum
When Mpi = 0
Mpi = MR - MC = 0
MR = MC