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Business Strategy
Chapter 1
The Fundamentals of Managerial
Economics
Conclusion
Make sure you include all costs and benefits
when making decisions (opportunity cost).
When decisions span time, make sure you
are comparing apples to apples (PV
analysis).
Optimal economic decisions are made at the
margin (marginal analysis).
Appendix A
Calculus of Maximizing Net Benefits
And other useful Math stuff
Function
Y a bX
Dependent Variable
Independent Variable
Y-intercept
Slope
What is slope???
Marginal Analysis
Looks at the change in the dependent variable that
results from a unit change in the independent
variable
Price
Profit
Revenue
Cost
Profit
Constant
Y = mX + b
Derivatives
The derivative of Y with
respect to X
dY
dX
Derivative RULES
Y bX
Constants
ALWAYS ZERO!!!
What is the derivative of 10?
Zero
Power Functions
Y 10X
dY
( n 1)
nbX
dX
dY
2
30X
dX
More Rules
Sums and Differences
Y 3X 4 X
2
dY dU dV
dX dX dX
dY
2
6 X 12 X
dX
And more
Products
Y 5 X (7 X )
2
dY
dV
dU
U
V
dX
dX
dX
dY
2
10 X (7 X ) 5 X
dX
dY
70 X 10 X 2 5 X 2
dX
dY
70 X 15 X 2
dX
And more
Quotient
Denominator MULTIPLIED by
derivative of the numerator
MINUS numerator MULTIPLIED
by the derivative of the
denominator ALL DIVIVED BY
the denominator squared
5X 9
Y
2
10 X
dY V (dU dX ) U (dV dX )
2
dX
V
dY 10 X (5) (5 X 9)(20 X )
2 2
dX
(10 X )
2
dY 50 X 100 X 180 X
4
dX
100 X
dY 5 X 10 X 18
3
dX
10 X
dY 18 5 X
Divide by 10X
3
dX
10 X
2
Total Revenue
TR = 7Q 0.01Q2
What is the Marginal Revenue function?
MR = 7 - 0.02Q
TC = 100 8Q + 10Q2
What is the Marginal Cost function?
MC = -8 + 20Q