7/10/19 Managerial Economics
Extent Decisions and Investment Decisions
Extent decisions and marginal analysis
o Marginal analysis: can be used to determine the direction of change but not the exact
distance. Distance is discovered by experimentation.
- Works for any extent decision
o Used to analyse an extent decision: break down the decision into small steps and assess
the costs/benefits of taking another step.
o Fixed costs are irrelevant in extent decisions.
o It can answer questions such as:
o Is your workforce big enough or too big?
o Should you increase the quality of service?
o Should you change the level of advertising?
o How safe should you make your work environment?
E.G: American Express: Platinum cards to affluent customers.
o Company considered expanding, but how many?
o Financial threshold lowered to increase the consumer range and attract more people.
o Cost of customer services rise but the expected revenue increases due to an increased
number of customers.
o This is an extent decision as the company had to decide “how many” cards to provide.
Marginal cost and other types
o Total cost (TC) = FixedC+VariableC
o Marginal cost: The additional cost to produce and sell one additional unit of output.
Variable costs only.
= TCQ+1 – TCQ
o Variable costs = Marginal costs (MC) x Quantity (Q)
o Average costs = Total cost of production / Quantity produced
o Determined by marginal costs. If the marginal cost is above average, it will bring the
average costs up
o These ‘hide’ fixed costs, by combining them with the variable costs.
o Typically, MR falls and MC rises, the more you do.
, 7/10/19 Managerial Economics
Marginal revenue
o The additional revenue gained from producing and selling one more unit.
o If the benefits of selling another unit (MR) are bigger than the costs (MC), then sell
another unit due to the profit increase.
o Profits are maximized when MR=MC.
o Sell more if the marginal revenue is greater than the marginal costs.
Area of increasing marginal costs
(diminishing marginal returns) Marginal
Cost
Cost
Too much of one resource
such as staff and thus
production is less
efficient.
Output
- If marginal costs are
above the average costs,
it will cause the average
to be brought up
Cost
Marginal
Cost
Average
Total Cost
- Profit is the price they sell
the product for minus the
average cost.
Output
(‘Supernormal’ profit box)
- Marginal revenue =
Marginal cost means a
maximisation of profit.
- Demand is stronger is the
AR and MR shift up on
the demand curve.
- If AR and MR shift down,
output may have to be
reduced, affecting profit.
Extent Decisions and Investment Decisions
Extent decisions and marginal analysis
o Marginal analysis: can be used to determine the direction of change but not the exact
distance. Distance is discovered by experimentation.
- Works for any extent decision
o Used to analyse an extent decision: break down the decision into small steps and assess
the costs/benefits of taking another step.
o Fixed costs are irrelevant in extent decisions.
o It can answer questions such as:
o Is your workforce big enough or too big?
o Should you increase the quality of service?
o Should you change the level of advertising?
o How safe should you make your work environment?
E.G: American Express: Platinum cards to affluent customers.
o Company considered expanding, but how many?
o Financial threshold lowered to increase the consumer range and attract more people.
o Cost of customer services rise but the expected revenue increases due to an increased
number of customers.
o This is an extent decision as the company had to decide “how many” cards to provide.
Marginal cost and other types
o Total cost (TC) = FixedC+VariableC
o Marginal cost: The additional cost to produce and sell one additional unit of output.
Variable costs only.
= TCQ+1 – TCQ
o Variable costs = Marginal costs (MC) x Quantity (Q)
o Average costs = Total cost of production / Quantity produced
o Determined by marginal costs. If the marginal cost is above average, it will bring the
average costs up
o These ‘hide’ fixed costs, by combining them with the variable costs.
o Typically, MR falls and MC rises, the more you do.
, 7/10/19 Managerial Economics
Marginal revenue
o The additional revenue gained from producing and selling one more unit.
o If the benefits of selling another unit (MR) are bigger than the costs (MC), then sell
another unit due to the profit increase.
o Profits are maximized when MR=MC.
o Sell more if the marginal revenue is greater than the marginal costs.
Area of increasing marginal costs
(diminishing marginal returns) Marginal
Cost
Cost
Too much of one resource
such as staff and thus
production is less
efficient.
Output
- If marginal costs are
above the average costs,
it will cause the average
to be brought up
Cost
Marginal
Cost
Average
Total Cost
- Profit is the price they sell
the product for minus the
average cost.
Output
(‘Supernormal’ profit box)
- Marginal revenue =
Marginal cost means a
maximisation of profit.
- Demand is stronger is the
AR and MR shift up on
the demand curve.
- If AR and MR shift down,
output may have to be
reduced, affecting profit.
