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N. L. DalmiaInstitute of Management Studies and Research

(A School of Excellence of N.L. Dalmia Educational Society)

Managerial Economics

-Prof. Ruchika Agarwal

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3/9/2011 Managerial Economics 2

Basic Economic Relations

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Optimal decision The alternative that produces a result most consistent with

managerial objectives.

Functional relations

Total revenue, TR = P*Q where TR is a dependent variable and p& q are independent variables.

Marginal relations

It is the change in the dependent variable caused by a one-unitchange in an independent variable.

Maximization ofprofit occurs where the marginal switches frompositive to negative.

If marginal > average, the average must be increasing.

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Knowledge of geometric relations among total, marginal can prove usefulin managerial decision making.

Average profit

Total profit/q, slope of line from the origin to the point.

It is maximized at a point where mp=ap as after this , since mp < ap.

Marginal Profit

At any point, along a total curve, the corresponding marginal figure isgiven by the slope of a line drawn tangent to the total curve at thatpoint.

Total profit is maximized where mp = 0

Point of inflection is the point where mp or slope of total profit curve ismaximized. Between point of inflection and point of total profitmaximization ,tp continues to rise as mp is +ve, even though it is falling.

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Marginal analysis is very important in economic decision making.

Derivative of a function is a very precise measure of its slope or marginal

value at a particular point. So, maximization or minimization occurs when

its derivative or marginal is zero.

Profit= -10,000 + 400q - 2q^2

If output = 0, firms incurs a loss of10,000 i.e the fixed cost.

Mp = slope of total profit = dp/dq = 400 - 4q =0 or q=100

Equation shows that ifq > 100, mp

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Profit maximization:

Marginal profit = 0 or marginal revenue = marginal cost.

When mr > mc; it implies that total revenue is rising faster than the

total cost.

Divergence between total revenue & total cost continues to increase as

long as tr is rising faster than tc or mr > mc.

Therefore in determining the optimal activity level for a firm, the marginal

relation tells us that as long as the increase in revenue associated with

expanding output exceeds the increase in cost, continued expansion will

be profitable.

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Incremental concept

Incremental analysis is very useful in managerial decisionmaking

The incremental change is the comprehensive impact from a

given managerial decision.

A firm may refuse to sublet a warehouse space for 5000 as leasecost is 7500. If warehouse is not in current use, then 7500 isirrelevant.

Similarily, a new product line might lead to an increase in revenuesbut loss in revenues due to fall in existing product lines must not beignored.

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