BASICS OF ECONOMICS

Dr Seema Jhala
 Economics-Definitions
• Definitions
• Adam Smith –(1776) -Adam Smith was a Scottish philosopher, widely considered as
the first modern economist. Smith defined economics as “an inquiry into the nature
and causes of the wealth of nations.”

• Criticism of Smith’s Definition

• The wealth-centric definition of economics limited its scope as a subject and was seen
as narrow and inaccurate. Smith’s definition forced the subject to ignore all non-
wealth aspects of human existence.
• The Smithian definition over-emphasized the material aspects of well-being and
ignored the non-material aspects. It was assumed that human beings acted as rational
economic agents who mindlessly strived to maximize their own well-being.
• The Smithian definition prevents the subject from exploring the concept of resource 
scarcity. The allocation and use of scarce resources are seen as a central topic of
analysis in modern economics.
 Economics –Definitions
• Marshall -Economics is the study of human activities in the ordinary course
of business. It studies how man attains his income and how he utilizes it.

• Criticism of Marshall’s Definition

• The Marshallian definition, like the Smithian definition, ignored the problem of
scarce resources, which possess unlimited potential uses.
• Marshall’s definition restricted economics as a subject to only analyze the
material aspects of human welfare. Non-material aspects of welfare were
ignored. Critics of the Marshallian definition asserted that it was difficult to
separate material and non-material aspects of welfare.
• The Marshallian definition does not provide a clear link between the
acquisition of wealth and welfare. Marshall’s critics claimed that it left the
subject in a state of perpetual confusion. For instance, there are plenty of
activities that might generate wealth but that can reduce human welfare.
 Economics –Definitions
• L.Robbins-Lionel Robbins defined economics as. “the science which
studies human behaviour as a relationship between ends and
scarce means which have alternative
• Robbin’s definition of economics transformed the subject from a
normative social science into a positive science with an undue
emphasis on individual choice. His definition prevented the subject
from analyzing topics such as social choice and social interaction
theory, which are important topics within the modern microeconomic
theory.
• Robbin’s definition prevented it from analyzing macroeconomic
concepts such as national income and aggregate supply and demand.
Instead, economics was merely used to analyze the action of
individuals, using stylized mathematical models.
 Economics –Definitions
• Samulson -According to Prof. Paul A. Samuelson “ Economics is the study
of how men and society choose with or without the use of money , to
employ the scarce productive resources which have alternative uses , to
produce various commodities over time and distribute them for
consumption now and in future among various people and groups of
society. It analyses the costs and benefits of improving pattern of resource
allocation”

• Economics is a social science concerned with the production,

distribution, and consumption of goods and services. It studies how
individuals, businesses, governments, and nations make choices about
how to allocate resources.
 Economics
General Introduction of Economics with recent News
• Maruti Suzuki Production likely to be at 40 percent of normal
levels in september due to semi conductor shortages .
• Jio brings new prepaid plans with Disney+Hotstar
Subscription  Jio also included a Rs. 549 data add-on pack
that bundles the Disney+ Hotstar Mobile subscription
alongside offering 1.5GB high-speed data access.
• Fiscal deficit for April-july period reaches 21.3 percent of full
year target. (MACROECONOMIC INDICATORS)
•
 ECONOMICS
• India Q1 GDP preview: Strong double-digit
growth expected; economy unfazed by Covid
wave, base effect in play
 Economics
• RBI MPC August 2021: Monetary Policy meet
begins; repo rate cut unlikely for 7th time in
a row.(Effect of Bank rates)

• INDIAN ECONOMY -
 Economics is Science or Art
• Economics is both a science and an art. Economics is
considered as a science because it is a systematic knowledge
derived from observation, study and experimentation. But
laws of economics are less perfect as compared with the laws
of pure sciences. An art is the practical application of
knowledge for achieving definite ends. Science provides
knowledge about a phenomenon and an art teaches us to do a
thing. For example, inflation in a country. This information is
derived from positive science. The government takes certain
fiscal and monetary measures to bring down the general level
of prices in the country. The study of these fiscal and monetary
measures to bring down inflation makes the subject of
economics as an art.
 Economics is Positive or Normative Science:

• Lionel Robbins, Senior and Friedman have described economics

as a positive science. They opined that economics is based on
logic. It is a value theory only. It is, therefore, neutral between
ends.
• Marshall, Pigou, Hawtrey, Keynes and many other economists
regard economics as a normative science. According to them,
the real function of the science is to increase the well-being of
man. They have given suggestions in their works for promotion
of human welfare.
• Economics, to conclude, has both theoretical as well as practical
side. In other words, it is both a positive and a normative
science.
 Economics-Definitions
• Definitions
• Adam Smith -Adam Smith was a Scottish philosopher, widely considered
as the first modern economist. Smith defined economics as “an inquiry
into the nature and causes of the wealth of nations.”
• Marshall -Economics is the study of human activities in the ordinary
course of business. It studies how man attains his income and how he
utilizes it.
• L.Robbins-Lionel Robbins defined economics as. “the science which
studies human behaviour as a relationship between ends and scarce
means which have alternative uses” 
• Samulson -According to Prof. Paul A. Samuelson “ Economics is the study
of how men and society choose with or without the use of money , to
employ the scarce productive resources which have alternative uses , to
produce various commodities over time and distribute them for
consumption now and in future among various people and groups of
society. It analyses the costs and benefits of improving pattern of resource
allocation”
 Micro and Macro Economics
• Economics is divided into two categories:
• Microeconomics and
• Macroeconomics.

• Microeconomics is the study of individuals and business decisions,

while macroeconomics looks at the decisions of countries and
governments.
 Microeconomics
• Microeconomic study deals with what choices people make, what factors
influence their choices and how their decisions affect the goods markets by
affecting the price, the supply and demand. The term Micro Economics is
derived from the Greek work “Mikros” which means “Small”.
 CHARACTERISTICS OF MICRO ECONOMICS

Following are the characteristics of economics:

• Study of individual units-individual income,I ndividual production

• Study of small variable that could not affect whole economy –consumption of
one person or production of one firm

• Price Theory: - Micro economics analyses how the prices of individual

commodities and services are determined. It also explains how millions of
producers and consumers take decision regarding allocation of resources

• Partial equilibrium analysis: - Micro Economics makes partial equilibrium

analysis. Micro economics is based on the assumption ‘Ceteris paribus’ (which
means ‘other things being constant).  
 
 CHARACTERISTICS OF MICRO ECONOMICS

• Uses Slicing method: - Micro economics uses slicing method for in-
depth study of economic units. It divides or slices the economy into
smaller units, (such as individual households, individual firms, etc) for
the purpose of in-depth study. 

• Micro Vision: - Micro Economics studies in detail about the behaviour

of individual economic units it examine the trees and not the entire
forest.
 
• Not a study of Aggregates: - Micro Economics is distinct from Macro
Economics. In Macro Economics we are concerned with the economy as
a whole. In micro economics we are concerned with the study of
Individual units.
 USE AND NEED OF MICRO ECONOMICS

Micro Economics has been used since ancient times. Although at present
Macro Economics is being used largely yet the uses of Micro Economics is
as follows:
• Essential for whole economy:. individual makes aggregates
• Helpful for whole economy: Price determination
• Helpful in formulating economic polices: Taxes and Subsidies.
(Necessity, comfort,Luxury) (Price of particular commodity ,labour cost)
• Investigation of condition of economic welfare: effect of public
expenditure and taxes on individual consumption .Therefore
Microeconomics is used to understand economic welfare.
• Useful in decision making for individual units-consumer tries to
maximise utility and producer maximize profit.
 Limitations of Micro economics
• Micro economics is practiced since ancient era and has been accepted as a
essential part of economics for the study of economic problems.
• But it has certain limitations. They are as follows: -
• Narrow (Not represents whole economy)
• Unreal assumptions-Based on the assumptions of Full employment ,
Rational consumer,Laissez faire, perfect competition ,ceteris peribus,
• Certain conclusions of micro economics analysis are not suited from the
point of view of whole economy-individual saving is good but not saving
by all. 
 Macroeconomics
• Macroeconomics on the other hand, studies the behavior of a country and
how its policies impact the economy as a whole. It analyzes entire
industries and economies, rather than individuals or specific companies,
which is why it's a top-down approach.
• It studies the character of the forest, independently of the trees.“
• National income rather than individual income.

The problems of the whole economy are studied under macro economics
like National income, total production, employment, total supply.
 
 Characteristics of Macroeconomics

• Study of aggregates
• Lumping method is used ( Group)- Agriculture , industries and services
• General equilibrium analysis
• Income analysis –How to increase income and employment
• Policy oriented
• Dynamic
 Need and use of macro economics

• It helps in the determination of public economic policy (saving by

high interest in Fixed deposi D ,investment Public and private
investment etc)
• It helps in understanding  the scale of economic development (By
indicators like National income, ratio of direct tax /total tax, poverty
,employment etc) (at which level ,we are) (By seeing all economic
indicators)
• Useful in studying micro economics (Laws and theories of
Microeconomics are based on the studies of Groups)
• It is useful in the study of complicated economy –give us the real
picture of the whole economic organization and working while
micro economic gives insight only into an individual unit or firm.
 LIMITATIONS OF MACRO ECONOMICS

• Excessive generalization -It assumes what is good for one, is good for all.
SAVING BY ONE MAY BE GOOD,  For instance, a loss incurred by one
firm in an industry does not necessarily imply losses to all other firms in
it.  For instance, a general rise in prices may not affect all the sections of
the community in the same manner. A consumer suffers from rising price
level while a producer benefits from it.

• It assumes homogeneity among individual units (income may increase for

government officers)
 Relationship between Micro and Macro Economics
 

• Interdependence of Micro and Macro Economics

 
• Micro and macro economics are two different methods of economics
which are complimentary. Neither of the two are complete in itself. Each
has its own defects and limits. Shortcoming of one is fulfilled by the other
 Dependence of Microeconomics in Macroeconomics

• Microeconomics matters deeply depend upon the macroeconomic activity.

For example, price, rate of interest, rate of profit, wages etc all are known
as microeconomic topics. But all they depend upon macroeconomic
behavior. Price, rate of interest, wage are determined by their demand and
supply in country not by individual demand and supply. Same way, profit
of any firm depends upon the nature of market, aggregate demand, national
income, and general price level in economy. Aggregate demand, price
level, national income, employment etc are deeply affected by
microeconomic fluctuations. Thus, change in macroeconomic indicators
brings the change in microeconomic activities.
 Dependence of Macroeconomics in Microeconomics

• Macroeconomics is overall study of microeconomic units. For

example, employment of the country is the sum of all individual
employment in different sectors. National income and national
output is the sum of income and output of thousands of person and
firms. ( Inflation )Price level shows the average price, which comes
through the appropriate calculation of prices of all transected
commodities in the country in a fiscal year. Same way many theories
of macroeconomics are derived from microeconomics theories. For
example total consumption function(MPC) and total investment
function(rate of Interest) are based on the behavior of individual
consumers and firms respectively. Thus, as a conclusion, it can be
said that the study of macroeconomics comes throughout of
microanalysis.
Difference Between Micro and Macro Economics
 Economics in Decision Making

• Microeconomic problem
• What to produce and in what quantities?
• Choice of commodities and its quantity
How to produce?
choice of labour intensive/capital intensive technique
• For whom to produce or how to distribute social output?
 Kinds of economic decision
• Macroeconomic problems
• How to increase the production capacity of the economy ?
• (Why some economies grow faster than other?)
• How to stablize the economy ?
• (Business cycle)
 Kinds of economic decision
• Production Possiblity curve
• Opportunity cost
Managerial Economics
Characteristics of Managerial Economics
• Micro economic
• Normative
• Pragmatic
• Prescriptive
• Also uses Macro economic analysis
Scope of Managerial Economics
1. Demand Analysis and Forecasting. Demand Determinants, Demand
Distinctions (Recurrent Newspaper,Derived mobile and its inputs ) and
Demand Forecasting etc.
2. Cost and Production Analysis. Cost concepts, cost-output relationships,
Economies and Diseconomies of scale and cost control.
3. Pricing Decisions, Policies and Practices. Market Structure Analysis,
Pricing Practices and Price Forecasting.
4. Profit Management.It is therefore, profit-planning and profit
measurement that constitutes the most challenging area of business
economics.
5. Capital Management. capital management i.e., planning and control of
capital expenditure. It deals with Cost of capital, Rate of Return and
Selection of projects.
Principles relevant to Managerial Economics

•  The Incremental Concept

• The Concept of Time Perspective
• The Opportunity Cost Concept
• The Discounting Concept
• The Equi-marginal Concept
• Risk and Uncertainty
 The Incremental Concept
• While marginal cost refers to the change in total cost resulting from
producing an additional unit of output, incremental cost refers to total
additional cost associated with the decision to expand output or to add a
new variety of product etc. 
• The two major concepts in this analysis are incremental cost and
incremental revenue. Incremental cost denotes change in total cost,
whereas incremental revenue means change in total revenue resulting from
a decision of the firm.
• The incremental principle may be stated as follows:
• A decision is clearly a profitable one if
• (i) It increases revenue more than costs.
• (ii) It decreases some cost to a greater extent than it increases others.
• (iii) It increases some revenues more than it decreases others.
 Concept of Time Perspective
•The time perspective concept states that the decision maker must give due consideration
both to the short run and long run effects of his decisions. He must give due emphasis to the
various time periods. It was Marshall who introduced time element in economic theory.
•In the short period, the firm can change its output without changing its size. In the long
period, the firm can change its output by changing its size. In the short period, the output of
the industry is fixed because the firms cannot change their size of operation and they can
vary only variable factors. In the long period, the output of the industry is likely to be more
because the firms have enough time to increase their sizes and also use both variable and
fixed factors.
•In the short period, the average cost of a firm may be either more or less than its average
revenue. In the long period, the average cost of the firm will be equal to its average
revenue. A decision may be made on the basis of short run considerations, but may as time
elapses have long run repercussions which make it more or less profitable than it at first
appeared.
 3. The Opportunity Cost Concept:

• Opportunity cost of a decision is the sacrifice of alternatives required by

that decision. Sacrifice of alternatives is involved when carrying out a
decision requires using a resource that is limited in supply with the firm.
Opportunity cost, therefore, represents the benefits or revenue forgone by
pursuing one course of action rather than another.
• (NEXT BEST PAID FORGONE)

• The concept of opportunity cost implies three things:

• 1. The calculation of opportunity cost involves the measurement of
sacrifices.
• 2. Sacrifices may be monetary or real.
• 3. The opportunity cost is termed as the cost of sacrificed alternatives.
 3 .Opportunity Cost
• Opportunity cost is just a notional idea which does not appear in the books
of account of the company. If resource has no alternative use, then its
opportunity cost is nil.
• In managerial decision making, the concept of opportunity cost occupies
an important place. The economic significance of opportunity cost is as
follows:
• InManagerial Economics, the opportunity cost concept is useful in
decision involving a choice between different alternative courses of
action. 
 4. Equi-Marginal Concept:

• The equimarginal principle states that consumers will choose a combination

of goods to maximize their total utility. This principle is also known the
principle of maximum satisfaction - by allocating available resource to get
optimum benefit . This principle provides a basis for maximum utilization of
all the inputs of a firm so as to maximize the profitability.

• It is behind any rational budgetary procedure. The principle is also applied in

investment decisions and allocation of research expenditures. For a consumer,
this concept implies that money may be allocated over various commodities
such that marginal utility derived from the use of each commodity is the same.
Similarly, for a producer this concept implies that resources be allocated in
such a manner that the marginal product of the inputs is the same in all uses.
 5. Discounting Concept:

• This concept is an extension of the concept of time perspective. Since

future is unknown and incalculable, there is lot of risk and uncertainty in
future. Everyone knows that a rupee today is worth more than a rupee will
be two years from now. This appears similar to the saying that “a bird in
hand is more worth than two in the bush.”. It is simply that in the
intervening period a sum of money can earn a return which is ruled out if
the same sum is available only at the end of the period. In technical
parlance,
 6. Risk and Uncertainty:

• Managerial decisions are actions of today which bear fruits in future which
is unforeseen. Future is uncertain and involves risk. The uncertainty is due
to unpredictable changes in the business cycle, structure of the economy
and government policies.
• This means that the management must assume the risk of making decisions
for their institution in uncertain and unknown economic conditions in the
future. Firms may be uncertain about production, market prices, strategies
of rivals, etc. Under uncer­tainty, the consequences of an action are not
known immediately for certain.
• Economic theory generally assumes that the firm has perfect knowledge of
its costs and demand relationships and of its environment. Uncertainty is
not allowed to affect the decisions. Uncertainty arises because producers
simply cannot foresee the dynamic changes in the economy and hence,
cost and revenue data of their firms with reasonable accuracy.
 Risk and Uncertainty:

• Also dynamic changes are external to the firm, they are beyond the
control of the firm. The result is that the risks from unexpected
changes in a firm’s cost and revenue data cannot be estimated and
therefore the risks from such changes cannot be insured. But
products must attempt to predict the future cost and revenue data of
their firms and determine the output and price policies.
• The managerial economists have tried to take account of uncertainty
with the help of subjective probability. The probabilistic treatment
of uncertainty requires formulation of definite subjective expec­
tations about cost, revenue and the environment. The probabilities of
future events are influenced by the time horizon, the risk attitude
and the rate of change of the environment.
 Practical class

• Prepare a budget based on 20 heads of expenditure

differentiating between necessity , comfort and luxury (your
income is 30,000 rs) and you are head of the family of 4
persons having 2 children and spouse .
 Activity 2
• Make a list of 20 things
• Want (wish) Demand
 Activity 3
• Give two examples of Non economic activity and Material
welfare
 Activity 4
• Give two examples of economic activity and non material
welfare
 Activity 5
• Why Economics is a science – Give two
examples
• Why economics is a Art- Give two examples
 Activity 6
• Economics is positive science – Give two example
• Economics is a normative science- Give two example.
 Activity 7
• Collect articles from Newspaper (ET and Business
Standard) and Differentiate between Micro and
Macroeconomics news.
 Activity 8
• Evaluation of Newspaper articles on the basis of
economic principles.
 Kinds of economic decision
• The question of decision arises due to
• Unlimited human choices, wants and aspirations –
• To raise their standard of living
• For their next generational
• Multiplicative nature of some want
• Biological need(Food,water) are repetitive
• Demonstration effect
• Influences of advertisement
 Kinds of economic decision
• Scarcity of resources
• Natural resources (Land,Mineral,Rainfall)
• Human resources (Talent,skill)
• Men made resources (Machinary ,equipment)
• Entrepreneurship (Risk taking capacity)
• Scarcity of resources in terms of demand leads to make
choices.
 Decision Making
• Decision making is the process of identifying alternative
courses of action and selecting an appropriate alternative in a
given decision situation. This definition presents two
important parts: 1. Identifying alternative courses of action
means that an ideal solution may not exist or might not be
identifiable. 2. Selecting an appropriate alternative implies that
there may be a number of appropriate alternatives and that
inappropriate alternatives are to be evaluated and rejected.
Thus, judgment is fundamental to decision making. Choice is
implicit in our definition of decision making. We may not like
the alternatives available to us, but we are seldom left without
choices.
Managerial Economics

Dr Seema Jhala
Managerial Economics
Problems faced by a Manager or Owner

• What to produce and what are the factors

affecting it?
• What would be the inputand how to arrange
for inputs ?
• Factors affecting inputs availability ?
• What is the least cost combination INPUTS ?
• What pricing should be keep?
• Which method of pricing should be used ?
 Concepts of economics helpful for
Manager /owner
• Demand
• Supply
• Cost
• Revenue
• Production
• Types of Market
• Pricing
• Capital Budgeting
GRAPHS
 Skill 1

• How to draw and interpret

Graphs in Economics .
 Graph
• A Graph is a mathematical diagram which
shows the relationship between two or more
sets of numbers or measurements. 
 Activity 1
• Price (per gallon) Quantity Demanded(millions of
gallons)
• $1.00 800
• $1.20 700
• $1.40 600
• $1.60 550
• $1.80 500
• $2.00 460
• $2.20 420
 Activity 2
• Price (per gallon) Quantity Supplied (millions
of gallons)
• $1.00 500
• $1.20 550
• $1.40 600
• $1.60 640
• $1.80 680
• $2.00 700
• $2.20 720
 
 Activity3
• Price (per gallon) Quantity demanded (millions of gallons) Quantity supplied (millions of gallons)
• $1.00 800
•  
• 500
• $1.20
•  
• 700
•  
• 550
• $1.40
•  
• 600
•  
• 600
• $1.60
•  
• 550
•  
• 640
• $1.80
•  
• 500
•  
• 680
• $2.00
•  
• 460
•  
• 700
• $2.20
•  
• 420
•  
• 720
 Activity 4
• output Fixed Cost
• Q FC
• 0 50
• 1 50
• 2 50
• 3 50
• 4 50
• 5 50
• 6 50
• 7 50
• 8 50
• 9 50
• 10 50
 Activity 5
• output Variable Cost
• Q VC
• 0 0
• 1 40 40
• 2 70 35RS
• 3 90 30RS
• 4 100 25 RS/UNIT
• 5 120 24
• 6 150 25
• 7 190 27.11
• 8 240 30
• 9 300 33.33
• 10 370 37
 Activity 6
• output Total Cost
• Q C
• 0 50
• 1 90
• 2 120
• 3 140
• 4 150
• 5 170
• 6 200
• 7 240
• 8 290
• 9 350
• 10 420
 Activity 7
• output Marginal Cost
• Q MC
• 0 –
• 1 40
• 2 30
• 3 20
• 4 10
• 5 20
• 6 30
• 7 40
• 8 50
• 9 60
• 10 70
 Activity 8
• output Average Fixed Cost
• Q AFC
• 0 –
• 1 50
• 2 25
• 3 16.7
• 4 12.5
• 5 10
• 6 8.3
• 7 7.1
• 8 6.3
• 9 5.6
• 10 5
 Activity 9
• output Average Variable Cost
• Q AVC
• 0 –
• 1 40
• 2 35
• 3 30
• 4 25
• 5 24
• 6 25
• 7 27.1
• 8 30
• 9 33.3
• 10 37
 Activity 10
• output Average Cost
•  Q AC
• 0–
• 1 90
• 2 60
• 3 46.7
• 4 37.5
• 5 34
• 6 33.3
• 7 34.3
• 8 36.3
• 9 38.9
• 10 42
Activity 11
Activity 12
Activity 13
Activity 14
Activity 15
SKILL 2
 Application of Functions in Business and
Economics
• FUNCTION

• In mathematics, an expression, rule, or law that defines a relationship

between one variable (the independent variable) and another variable (the
dependent variable). 
• The symbol of a function 𝒚 = 𝒇 ( 𝒙 ) contains two important information:
1) ‘𝒚’ depends upon ‘𝒙’: ‘𝒚’ is the dependent variable and ‘ 𝒙’ is the
independent variable
• 2) For every value of 𝑥 there is only one corresponding value of 𝑦. For
example, in the function 𝑦 = 𝑥 + 1 if 𝑥 = 7, then there is only one
corresponding value of 𝑦 = 8.
 TYPES OF FUNCTIONS

• Univariate
• When Function has only one independent Variable.

• Multivariate
• When Function has more than one independent variable
 Derivatives and Partial derivatives
• The derivative of multivariate function is called partial
derivatives .
 Application of First Derivatives and First
Partial Derivatives
• The first derivative(s) of a function gives us the slope
of a function
• Positive (upward) slope
• Negative (Downward)Slope

• At stationary points, the slope (first derivative) is zero

Differentiation
 Constrained Optimization with Equality
Constraints
• Constrained Optimization with Equality Constraints Sometimes, the choice
variables can have a restriction or constraint. For example, a garments
factory can produce two products A and B (𝑥 and 𝑦 represent the amount
of produce A and B). The factory has to produce exactly 34 units of
product A and B in any combination for a foreign buyer. The last sentence
can be expressed mathematically as: 𝑥 + 𝑦 = 34 → this is an example of an
equality constraint. Hence, it is called an optimization problem with
equality constraint6 , since in this case the factory would want to produce
the 34 units at the lowest cost (cost minimization). More precisely, the
garments factory will produce the amount of A and B so that in total the
output is 34 units and the cost is minimum as well7 . Since, the objective is
to minimize cost we need the cost function (the objective function in this
case). Given, the cost function is: 𝐶 = 𝑓 𝑥, 𝑦 = 6𝑥 2 + 10 𝑦 2 − 𝑥𝑦 + 30
Equality constraint: 𝑥 + 𝑦 = 34 Constrained optimization with equality
constraint problems can be solved using the Lagrange Multiplier Method.
Note: The Lagrange Multiplier Method is used to solve constrained
optimization problem
 Summary and Important Points
At a stationary point (maximum, minimum or inflection point) the first derivatives or
first partial derivatives are equal to zero. To be sure whether a stationary point is a
maximum or minimum we need to perform further tests: - Using second derivatives if
it’s a univariate function - Using second and cross partial derivatives if it’s a
multivariate function - In case of constrained optimization with equality constraints we
need to check using the bordered Hessian matrix. We can apply the above concepts in
business optimization problems. In optimization problems we can apply the following
steps: 1) Identify the objective function 2) Identify the choice or decision variable(s) 3)
Differentiate the objective function with respect to the choice variables 4) Using first
order condition(s) find values of the choice variables 5) Check whether maximum or
minimum 𝑓′ = 2𝑄 − 10 2𝑄 − 10 = 0 Example (to understand the steps): Here, the
objective of the business is to minimize the average total cost (ATC). Therefore, in this
case the objective function would be the average total cost (ATC) function. ATC is a
function of 𝑄 (page 1). Here, 𝑄 is the choice variable, since the business can choose
the amount of 𝑄 they will produce. Differentiate with respect to 𝑄. E.g. 𝐴𝑇𝐶 = 𝑓 𝑄 = 𝑄
2 − 10𝑄 + 60 → 𝑄 = 5 𝑓 ′′ = 2 > 0 → ATC is minimized if the business produces 5 units