Optimization Techniques and New management Tools

Methods of Expressing Economic Relationships

Economic relationships can be expressed in the form of Equations, tables or
graphs. When the relationship is simple, a table or graph may be sufficient.
When the relationship is complex, however, expressing the relationship in
equational form may be necessary. Expressing an economic relationship in
equational form is also useful because it allows us to use the powerful
techniques of differential calculus in determining the optimal solution of the
problem (i.e. the most efficient way for the firm or other organization to
achieve its objectives or reach its goal).
For example, suppose that the relationship between the Total revenue (TR) of
a firm and the quantity (Q) of the good or service that the firm sells over a
given period of time, say, one year, its given by
TR=100Q 10Q2
By substituting into Equation 2-1 various values for the quantity sold, we
generate the total revenue schedule of the firm, shown in Table.
The Total Revenue Schedule of the Firm
Q
0
1
2
3
4
5
6

100 -10Q2
100( 0) -10(0)2
100( 1) -10(1)2
100( 2) -10(2)2
100( 3) -10(3)2
100( 4) -10(4)2
100( 5) -10(5)2
100( 6) -10(6)2

TR
$0
90
160
210
240
250
240

TR
300
250
200
150
100
50
0
0

7
Q

The TR curve rises up to Q=5 and declines thereafter. Thus we see that the
relationship between the total revenue of the firm and its sales volume can
be expressed in equational, tabular, or graphical form.
TOTAL, AVERAGE, AND MARGINAL RELATIONS
Total, average, and marginal relations are very useful in optimization analysis
A marginal relation is the change in the dependent variable caused by a oneunit change in an
independent variable. For example, marginal revenue is the change in total
revenue associated
with a one-unit change in output; marginal cost is the change in total cost
following a one-unit
change in output; and marginal profit is the change in total profit due to a
one-unit change in
output.
REVENUE RELATIONS

Total Revenue = Price Quantity

Marginal Revenue
Change in total revenue associated with a one-unit change in output.
Revenue Maximization

TR

AR

MR

90

90

90

160

80

70

210

70

50

240

60

30

250

50

10

240

40

-10

Profit Maximization

TR

TC

Profit

20

-20

90

140

-50

160

160

210

180

30

240

240

250

480

-230

Total Cost
Total Cost = Fixed Cost + Variable Cost.
Marginal and average cost.
Marginal cost is the change in total cost associated with a one unit change in
output. Average Cost = Total Cost/Quantity