CHAPTER11: A COMPARATIVE LOOK at MODELS of COMPANY BEHAVIOUR

1. CHAPTER11:A COMPARATIVE LOOK at MODELS of COMPANYBEHAVIOUR

2. Model Academic Discipline Break- Even Accountancy Linear Programming Management Science Theory of the Firm Economics • Three models come from its own particular academic discipline as follows

3. CRITERION [A]: COMPANY OBJECTIVE • 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.

4. The break-even point is a useful piece of descriptive information • The break-even model does not offer any obvious company objective.

5. CRITERION [B] : DECISION VARIABLES • 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.

6. 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.

7. CRITERION [C] : MARKET STRUCTURE • 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) • 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

8. Model (1) • 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.

9. TOTAL REVENUE curve • 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.

10. A decision has to be made as between simplicity of model structure and market realism. • if the modeller wants a simple , linear TR-curve then he must accept the assumption of non-price 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.

11. Model (2) • 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.

12. Total Cost • Models (1) and (2) are based upon relatively simple cost assumptions; • Model (3) is based upon a much more sophisticated cost structure

13. 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 • Summary