Transcript CHAPTER 6: LINEAR PROGRAMMING

CHAPTER11:
A COMPARATIVE
LOOK at MODELS of
COMPANY
BEHAVIOUR
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Three models come from its own
particular academic discipline as follows
Model
Academic Discipline
Break- Even
Accountancy
Linear Programming
Management Science
Theory of the Firm
Economics
CRITERION [A]: COMPANY
OBJECTIVE
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Linear programming model: MAXIMISE
PROFITS or MINIMISE COSTS
Economist's model: MAXIMISE PROFITS
The both model company behaviour as
depending fundamentally upon a desire to
optimise ( that is to maximise or minimise ) a
clearly specified objective.
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The break-even point is a useful piece of
descriptive information
The break-even model does not offer any
obvious company objective.
CRITERION [B] : DECISION
VARIABLES
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Models (1) and (3): To analyse single product
firms -- to produce 1 product only.
Model (3): 1 SINGLE DECISION VARIABLE the number of units of output to maximize
The break-even model:one decision variable
Models (1) and (3) seem somewhat limited in
that they are restricted to handling single
product firms which has a rather
uncomfortable feel about it in terms of realism.
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Linear programming model: multi-product
decision variables (>=2)
Model (2) appears to be more realistic
than models (1) and (3) in that it offers the
chance to analyse problems where the
company can be seen as producing more
than one product.
CRITERION [C] : MARKET
STRUCTURE
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This criterion tries to identify what sort of
assumptions the models make about the structure of
the consumer markets in which the company sells
its products.
Model (3)
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The inverse relationship between unit price and quantity
demanded is a fundamental building block in the
economist's model of individual company behaviour.
demand curve: linear , downward sloping
Total Revenue curve is non-linear
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Model (1)
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No matter how many units ( that is , few or
many ) are sold in the market place the selling
price per unit does not change.
Assumption about the shape of product
demand : at the going market price , quantity
demanded can be anything.
Any amount of output can be sold on the open
product market at the going , fixed market price.
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TOTAL REVENUE curve
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models (1): The assumption of fixed product
price gives rise to a positively sloped , LINEAR
total revenue curve
Model (3): The assumption of a price sensitive
product with a downward sloping demand
curve gives rise to a NON-LINEAR , RISING
then FALLING total revenue curve
The more complex TR shape is a direct
consequence of the assumption made about
the shape of the demand curve.
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A decision has to be made as between
simplicity of model structure and market
realism.
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if the modeller wants a simple , linear TR-curve
then he must accept the assumption of nonprice sensitive product demand ;
if the modeller argues that a price sensitive
product market is more realistic then he has no
option but to work with a non-linear TR-curve.
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Model (2)
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The same product demand shape as model (1)
The coefficients in the objective function typically
depend upon unit selling prices.
if the coefficients do not change then the unit selling
prices can not be changing.
In terms of product demand , models (1) and (2)
are based upon similar market structures that
give rise to linear total revenue curves. Model 3
is different in that it builds upon an assumption of
price sensitive product markets thus giving rise to
a more complex modelling TR-shape.
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Total Cost
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Models (1) and (2) are based upon relatively
simple cost assumptions;
Model (3) is based upon a much more
sophisticated cost structure
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Summary
MODEL
COMPANY
OBJECTIVE
NUMBER OF
PRODUCTS
MARKET
STRUCTURE
Break-Even
None
1
Unit Selling Price
Fixed
Linear
Programming
Maximise
Profit/Minimise
Cost
Many
Unit Selling Price
Fixed
Theory of the
Firm
Maximise Profit
1
Downward Sloping
Demand Curve