CHAPTER1T1 A COMPARATIVE LOoK at MoDELS of COMPANY BEHAVIOUR
CHAPTER11: A COMPARATIVE LOOK at MODELS of COMPANY BEHAVIOUR
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
◼ 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 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
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
The break-even point is a useful piece of descriptive information The break-even model does not offer any obvious company objective
◼ 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 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
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
Linear programming model: multi-product decision variables(=2) Model (2) appears to be more realistic than models()and 3) in that it offers the chance to analyse problems where the company can be seen as producing more than one product
◼ 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 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 a Model (3) a 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 o Total revenue curve is non -linear
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
Model a No matter how many units( that is,few or many ) are sold in the market place the selling price per unit does not change a Assumption about the shape of product demand at the going market price, quantity demanded can be anything a Any amount of output can be sold on the open product market at the going, fixed market price
◼ 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
TOTAL REVENUE curve a models(1): The assumption of fixed product price gives rise to a positively sloped, LINEAR total revenue curve a 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 a The more complex TR shape is a direct consequence of the assumption made about the shape of the demand curve
◼ 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
a decision has to be made as between simplicity of model structure and market realism a if the modeller wants a simple, linear TR-curve then he must accept the assumption of non- price sensitive product demand a 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
◼ 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 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