Managerial Economics in a

Global Economy, 5th Edition

by
Dominick Salvatore

Chapter 2
Optimization Techniques
and New Management Tools

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 1
 Expressing Economic
Relationships

Equations: TR = 100Q - 10Q2

Tables: Q
TR
0
0
1
90
2 3 4 5 6
160 210 240 250 240
TR
300

250

Graphs:
200

150

100

50

0
0 1 2 3 4 5 6 7

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2
 Total, Average, and
Marginal Cost
Q TC AC MC
0 20 - -
AC = TC/Q 1 140 140 120
2 160 80 20
MC = TC/Q 3 180 60 20
4 240 60 60
5 480 96 240

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3
 Total, Average, and
Marginal Cost
TC ($)
240

180

120

60

0
0 1 2 3 4
Q

AC, MC ($) MC
AC

120

60

0
0 1 2 3 4 Q
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 4
 Profit Maximization

Q TR TC Profit
0 0 20 -20
1 90 140 -50
2 160 160 0
3 210 180 30
4 240 240 0
5 250 480 -230

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 5
 Profit Maximization
($) 300
TC

240
TR
180
MC

120

60

MR
0 Q
0 1 2 3 4 5
60
30
0
-30 Profit
-60

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6
 Concept of the Derivative

The derivative of Y with respect to X is

equal to the limit of the ratio Y/X as
X approaches zero.

dY Y
 lim
Prepared by Robert F. Brooker, Ph.D. dX X 0 X
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 7
 Rules of Differentiation
Constant Function Rule: The derivative
of a constant, Y = f(X) = a, is zero for all
values of a (the constant).

Y  f (X )  a

dY
0
dX

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 8
 Rules of Differentiation
Power Function Rule: The derivative of
a power function, where a and b are
constants, is defined as follows.

Y  f (X )  aX b

dY
 b  a X b 1
dX

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 9
 Rules of Differentiation
Sum-and-Differences Rule: The derivative
of the sum or difference of two functions
U and V, is defined as follows.
U  g( X ) V  h( X ) Y  U V

dY dU dV
 
dX dX dX

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 10
 Rules of Differentiation
Product Rule: The derivative of the
product of two functions U and V, is
defined as follows.
U  g( X ) V  h( X ) Y  U V

dY dV dU
U V
dX dX dX

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 11
 Rules of Differentiation
Quotient Rule: The derivative of the
ratio of two functions U and V, is
defined as follows.
U
U  g( X ) V  h( X ) Y
V

dY

V dU  dX    U dV
dX 
2
dX V
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 12
 Rules of Differentiation
Chain Rule: The derivative of a function
that is a function of X is defined as follows.

Y  f (U ) U  g(X )

dY dY dU
 
dX dU dX

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 13
 Optimization With Calculus

Find X such that dY/dX = 0

Second derivative rules:
If d2Y/dX2 > 0, then X is a minimum.
If d2Y/dX2 < 0, then X is a maximum.

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 14
 New Management Tools
• Benchmarking
• Total Quality Management
• Reengineering
• The Learning Organization

Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 15
 Other Management Tools
• Broadbanding
• Direct Business Model
• Networking
• Pricing Power
• Small-World Model
• Virtual Integration
• Virtual Management
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 16