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

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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