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2a. Economic Optimisation Process (Variables: (Total Revenue, Marginal…
2a. Economic Optimisation Process
Optimal Decisions:
Best decision produces the result most consistent with managerial objectives
Value maximisation of the firm:
Produce what customers want
Meet Customer needs efficiently
Value of the firm is the present value of future profits
Profits are equal to TR - TC
At which output level is:
Revenue Maximised?
Average Cost Minimised?
Profits Maximised?
Variables:
Total Revenue
Marginal Revenue
Total Cost
Marginal Cost
Average Cost
Total Profit
Marginal Profit
Revenue Maximisation
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
Demand Function:
P = f(Q)
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
