MANAGERIAL DECISION MAKING

B.  Optimal Decisions Using Marginal Analysis

Marginal analysis - consider small changes in a decision

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1.  Model of the firm

a.  Setting

• Firm produces single good or service for a single market
• Objective is to maximize profit
• Task is to determine the price charged and the quantity to be produced and sold
• Assume that consequences of price and output decisions can be predicted with certainty

b.  Profit

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(1)  Revenue

R = P * Q

• Law of demand - all other factors held constant, price and the quantity demanded of a product are inversely related
  
  
• Demand curve

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• Demand is current demand only, assumed to be deterministic
  
  
• Revenue function

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(2)  Cost

• Cost function

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(3)  Profit maximization

• Profit function

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2.  Marginal analysis

• Marginal profit

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• Marginal revenue

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• Marginal cost

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• Profit maximization

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Ex. - Franchising

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