Linear Programming

The Concept
The mathematical method of trying to achieve something whilst taking into account a number of constraints i.e.; *Maximum consumer satisfaction subject to budget. *Maximising profits subject to cost constraints. *Minimising a company's salary bill taking into account capital labour ratio. *Maximising revenue for a sales company subject to the constraints of price elasticity of demand. So... Linear Programming problems are really about finding optimal solutions to problems which are expressed in terms of entity which needs to be optimised (the objective function), given certain constraints. Both objective function and all of the constraints are expressed as linear equations. e.g - y = 4x + 7 etc.

Understanding Objective Functions and Constraints: A Simple Overview of Businesses and Households

Objective Functions or Targets

Maximise Profits Maximise Dividends Minimise Costs

Constraints or Obstacles/Limiting Factors

Competitors
Customer Awareness Market Size Shareholder Demands Quality of Leadership & Management
Understanding Linear Programming

Eliminate Competitors
Achieve Market Power

BUSINESSES

BUSINESSES
Prices of Goods/Services Income Unemployment

Maximise household Income Maximise consumer satisfaction through consumption of goods & services Maximise consumption

Limited of low value skills

HOUSEHOLDS HOUSEHOLDS

Agents & Functions

Economic Agent HM Treasury An Airline A Consumer A Car Manufacturer Objective Function Maximise Tax Revenue Minimise Fuel Costs To maximise satisfaction for a given amount of household income Maximise sales of a new model

Objective functions not always easy to frame in practice i.e. what is the objective function of this MBA?

Consumer (Economic Agent)

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Constraints faced by the consumer Fixed/given income Prices of goods Fixed quantity of goods available Desired goods unavailable i.e. alcohol to under 18s

Simple Linear Programme Problem. Example 1

D&A is a small car manufacturer producing 2 models of handmade car. They are prestige vehicles and command a very high price. The 2 models are known as model X and model Y. Both models are very profitable. Car X produces 2,000 profit for each vehicle produced and model Y 3,000. D &A is motivated purely by profit. D&A cannot produce as many cars as it would like and cannot produce more than 15 cars per annum. For operational reasons, there are also constraints on the combinations of cars X and Y which can be manufactured in a given year. It is not possible, with current technology to produce more than 3 model Y cars for each model X car. Objective Function To maximise profit! Objective function as a simple expressions; P = Profit in a year X = the no of vehicles X sold in a year Y = the no of vehicles Y sold in a year Therefore P = 2000X + 3000Y There are 2 constraints; 1) D & A cannot produce more than 15 cars 2) No more than 3 lots of Y for every 1 X Constraint 1 ) X + Y < 15 Constraint 2) 3Y X or 3Y X 0

Example 2 more constraints

D & A2 are a revenue maximising firm. It has chosen to focus on the production and sale widget of A & B. Widget A requires 1 hour of skilled labour and 4kg of metal. A standard product, retailing at 40. Widget B requires 2 hours of skilled labour and demands 3kg of metal. A higher quality product, retailing at 50. D & A2 are constrained to 40 hours skilled labour and 120 kg of metal per day.

Objective Function: - To maximise Turnover (T)

Max T = 40A + 50B subject to; 1) A + 2B = < 40 hrs of skilled labour time 2) 4A + 3B = < 120kg of metal 3) A and B = > 0 Therefore A = 24 and B = 8 So, total revenue = (40 x 24) + (50 x 8) = 960 + 400 = 1,360 Shown as...

LP in your own life!

Personal Linear Programmes can be very useful i.e; - Maximising my module score subject to constraints on my time for work, family, social life, sleeping etc. - Maximising my income subject to constraints of striving to achieve work/life balance!

References:

http://freemind.sourceforge.net/wiki/index.php/main_page#Download_and_i nstall