# Q.

1/-A linear programming problem :
The formulation of linear programming problem mathematical model involves the following key steps. Step 1: Identify the decision variables to be determined and express them in terms of algebraic symbols such as x 1, x2 , x 3, ...... . Step 2: Identify all the limitations in the given problem and then express them as linear equations or inequalities in terms of above defined decision variables. Step 3: Identify the objective which is to be optimized (maximized or minimized) and express it as a linear function of the above defined decision variables.

The scope and role of linear programming in solving management problems:
Linear programming is very important in various fields of life especially in managerial decision making. The reason is that it helps the company in minimizing the costs and maximizing the profits. Through linear programming managers can calculate the prices and the sales units which can maximize the profits of the company. Therefore, there are various issues which the company incurs regarding their costs and prices therefore, tools like linear programming can help the managers in decision making progress.
the role of linear programming in managerial decision -making bringing out limitations:

LP has turned to be a highly useful tool of analysis in development planning. But its efficiency is restricted due to; It is not easy to define a specific objectives function. Even the objectives function is defined; it may not be easy to find out various social, institutional, financial and other constraints which may restrict in pursing the given objectives. Given a specific objective and set of constraints, it is possible that constraints may not be directly expansible as linear inequalities.It is difficult to estimates various constant coefficient that enter into a LP problem. LP is based upon relative relations between input and output. This means that input and output are additive, multiplicative and divisible. But the relation between input and output are not always linear. Most of relations are non-linear.Perfect competition is not found practically.LP is based upon CRS but in real life there is either IRS or DRS.

It is highly mathematical a complicated techniques. Particularly simplex method involves a large number of mathematical calculations. Most of LP models are based upon trial and error solutions and it is difficult to find out really optimal solutions to various economic problems. So all these limitation are based upon the economic problems

Q-2/ The concept and computational steps of the simplex method for solving linear programming problems:
Linear Programming : Simplex Method The solution is, x1 = 15 corrugated boxes are to be produced and x2 = 30 carton boxes are to be produced to yield a Profit, Zmax = Rs . 210.00 Summary of LPP Procedure Step 1: Formulate the LP problem. Step 2: Introduce slack /auxiliary variables. if constraint type is Â£ introduce + S if constraint type is Â³ introduce â½´ S + a and if constraint type is = introduce a Step 3: Find the initial basic solution. Step 4: Establish a simplex table and enter all variable coefficients. If the objective function is maximization, enter the opposite sign co-efficient and if minimization, enter without changing the sign. Step 5: Take the most negat ive coefficient in the objective function, Zj to identify the key column (the corresponding variable is the entering variable of the next iteration table). Step 6: Find the ratio between the solution value and the coefficient of the key column. Enter the v alues in the minimum ratio column. Step 7: Take the minimum positive value available in the minimum ratio column to identify the key row. (The corresponding variable is the leaving variable of the table). Step 8: The intersection element of the key column and key row is the pivotal element. Step 9: Construct the next iteration table by eliminating the leaving variable and introducing the entering variable. Step 10: Convert the pivotal element as 1 in the next iteration table and compute the other elements in that row accordingly. This is the pivotal equation row (not key row). Step 11: Other elements in the key column must be made zero. For simplicity, form the equations as follows: Change the sign of the key column element, multiply with pivotal equation el ement and add the corresponding variable. 147

Quantitative Techniques for Management Step 12: Check the values of objective function. If there are negative values, the solution is not an optimal one; go to step 5. Else, if all the values are positive, optimality is reached. Non-negativity for objective function value is not considered. Write down the values of x1, x2,â½¦â½¦..xi and calculate the objective function for maximization or minimization. Note: (i) If there are no x1, x2 variables in the fina l iteration table, the values of x1 and x2 are zero. (ii) Neglect the sign for objective function value in the final iteration table.

The name of the algorithm is derived from the concept of a simplex and was suggested by T. S. Motzkin.[7] Simplices are not actually used in the method, but one interpretation of it is that it operates on simplicial cones, and these become proper simplices with an additional constraint

(a). linear optimization) is a mathematical method for determining a way to achieve the best outcome (such as maximum profit or lowest cost) in a given mathematical model for some list of requirements represented as linear relationships. Linear programming is a specific case of mathematical programming (mathematical optimization). More formally, linear programming is a technique for the optimization of a linear objective function, subject to linear equality and linear inequality constraints. Its feasible region is a convex polyhedron, which is a set defined as the intersection of finitely many half spaces, each of which is defined by a linear inequality. Its objective function is a real-valued affine function defined on this polyhedron. A linear programming algorithm finds a point in the polyhedron where this function has the smallest (or largest) value if such point exists.

Q-4:
Mathematical Formation of Transportation Problem

Let,

i = Index for origin

j= Index for destination

. ... j = 1. total shipping cost is to be minimized as: Minimize Z = C11 X11 + Cl2 X|2 + . it is (C12 X|2). . from origin 1 to destination 2.Xij = Quantity shipped from origin µj¶ to destination µj¶ Cjj = Unit cost of shipping one unit from origin µj¶ to destination 'j¶ Si = Total capacity of origin 'j¶ dj = Total demand of destination 'j¶ We have objective of minimizing the total shipping cost (Z). 2. . . . From origin 1 to destination 1 the shipping cost is equal to the algebric product of unit shipping cost (C11) and quantity to be shipped (X11). Similarly. + C 2nX2n [Plant 2 +««««««««««««««« + Cm1Xm1 + Cm2Xm2 + « CmnXmn [Plant m or. Hence for 'm' origins and µn¶ destinations. we have similar set of constraints: . . + C In XIn [Plant 1 + C2IX21 + C22 X22 + . minimize : Z = i j Cij Xij for all j.n (1) (2)  m i=1 Xij = dj For each destination.

«n  Xij § ¦¥ ¤ £ f ¢¡   ll j. top left corner ). If for any cell.i j i j P formation of a rans ortation Problem North West Corner Rule The North West corner rule is a method for computing a basic feasible solution of a transportation problem. 3. 2. min(s1. 2.. If the supply for the first row is exhausted. . where the basic variables are selected from the North± West corner ( i e..e. If the demand for the first cell is satisfied. j .j=1. then move down to the first cell in the second row. Adjust the supply and demand numbers in the respective rowsand columns. d1).. then the next allocation can be made in cell either in the next row or column. Continue the process until all supply and demand values are exhausted. . 4.. we have non -      !  Si e ll t e s et. 6. we have. 5. . i. Select the north west (upper left hand) corner cell of the transportation table and allocate as many units as possible equal to the minimum between available supply and demand. then move hori ontally to the next cell in the second column. The standard North West Corner Rule instructions are paraphrased below: Steps 1. ly f e hs e sh l e shi e to the esti tions so th t total e and is ¤ § § ¤ ¤  ¤ ¥ ¦¥ § ¦¥        §  \$ # ¦   " 3  © ¨£ i=1mXij=dj for all j. % ¢¡ ¢¡ £ i nimi e m i mj ij Xij ««  Since the e can e only finite and ositive numbe of units which may be shi ne ativity constraints as follows:   ¦  ¢¡  £ ¢ ¢¡  S  dj 4 ed. supply equals demand.

and 60 gallons respectively. Each day the firm must furnish its four retail shops R1. The demand for the first column is satisfied. y y Example 1 Example 2 Example 1 The Amulya Milk Company has three plants located throughout a state with production capacity 50. 50. 20 units to cell P1R1. i. R3.e. The transportation costs (in Rs. The demand for the second column is also satisfied.) are given below. 75 and 25 gallons. Starting from the North west corner.. The allocation is shown in the following table. & R4 with at least 20. Table 1 Plant P1 2 P2 3 P3 Demand 20 Retail Shop R2 R3 5 5 6 20 7 8 9 50 6 2 2 60 Supply 50 30 75 25 R1 R4 Now we move hori ontally to the second column in the first row and allocate 20 units to cell P1R2. Plant P1 P2 P3 Demand Retail Shop R2 R3 5 7 5 8 6 9 20 50 Supply 50 75 25 R1 3 2 3 20 R4 6 2 2 60 The economic problem is to distribute the available product to different retail shops in such a way so that the total transportation cost is minimum Solution. 20) to P1R1.This trial routing method is often far from optimal. 20 . we allocate min (50. R2. Table 2 .

Plant P1 2 P2 3 P3 Demand 20 R1 Retail Shop R2 R3 7 5 6 20 8 9 50 6 2 2 60 R4 Suppl 50 30 10 75 25 Proceeding in this way. Initial basic feasible solution The total transportation cost is calculated by multiplying each xij in an occupied cell with the corresponding cij and adding as follows: 20 X 3 + 20 X 5 + 10 X 7 + 40 X 8 + 35 X 2 + 25 X 2 = 670 Least cost Method In this method. P3R4 = 25. allocations are made on the basis of economic desirability. The steps involved in determining an initial solution using least-cost method are as follows: Step1. Write the given transportation problem in tabular form (if not given). If the min (ai . bj) to this cell. then the availability of the ith origin is exhausted and demand at the jth destination remains as bj-ai and the ith row is deleted from the table. Final Table Plant P1 P2 P3 2 3 5 6 20 9 50 60 Retail Shop R2 R3 6 Suppl 50 75 25 R1 R4 Demand 20 Here. Step3. Step2. bj) = ai. and Number of plants (m) = 3 Number of basic variables = m + n ± 1 = 3 + 4 ± 1 = 6. j)th cell. The resulting feasible solution is shown in the following table. number of retail shops(n) = 4. we observe that P1R3 = 10. then demand at the jth destination is fulfilled and the availability at the ith origin remains to be ai-bj and the jth column is deleted from the table. P2R4 = 35. Suppose it is the (i. P2R3 = 40. Choose the cell with minimum cost. If it is not unique. bj) = bj. . anyone can be chosen. Again if min (ai. Allocate min (ai.

Again if min (ai. starting solutions. it is advisable to proceed with the initial feasible solution which is close to the optimal solution. Consequently. 3 until all origins are exhausted and all demands are fulfilled. but not always. Vogel¶s method often gives the better initial feasible solution to start with. Step3.Step4. Although Vogel¶s method ta es more time as compared to other two methods. Allocate min (ai. There is no way that we can predict that a transportation problem will have degenerate solution. Suppose it is the (i. Step4. then the availability of the ith origin is exhausted and demand at the jth destination remains as bj-ai and the ith row is deleted from the table. Repeat steps 2. but it reaches the time in reaching the optimal solution. Write the given transportation problem in tabular form (if not given). 3. . j)th cell. In VAM the cost difference indicate the penalties for not using the respective least cost routes. if we use the initial solution obtained by VAM and proceed to solve for the optimum solution. Choose the cell with minimum cost in the ith row. Step5. choose the cell with the minimum cost in this column. Choose the maximum difference or highest penalty cost. Repeat steps 2. Suppose it corresponds to the ith row. 4 with the remaining table until all origins are exhausted and all demands are fulfilled. Compute the difference between the minimum cost and the next minimum cost corresponding to each row and each column which is nown as penalty cost. Again if the maximum corresponds to a column. y y y In order to reduce large number of steps required to obtain the optimal solution. Write the given transportation problem in tabular form (if not given). The opportunity cost for a given supply row or demand column is defined as the difference between the lowest cost and the next lowest cost alternative. The steps involved in determining an initial solution using VAM are as follows: Step1. the amount of time required to arrive at the optimum solution is greatly reduced. Row minima method Step1. Step2. The Vogel¶s approximation method: VAM is an improved version of the least-cost method that generally. This method is preferred over the methods discussed above because it generally yields. produces better starting solutions. VAM is based upon the concept of minimizing opportunity (or penalty) costs. or close to optimum. bj) to this cell. bj) = bj. then demand at the jth destination is fulfilled and the availability at the ith origin remains to be ai-bj and the jth column is deleted from the table. 2. If the min (ai . bj) = ai. just by loo ing at it. an optimum. Note. The process must end as .

Step3. The process must end as . bj) to this cell. Step3. Then choose the cell with minimum cost in the second column and continue step III until the 2nd column is deleted. anyone can be chosen. Choose the cell with minimum cost in the first column. Repeat steps 2. 3.Step2. then demand at the jth destination is fulfilled and the availability at the ith origin remains to be ai-bj and the jth column is deleted from the table. Suppose it is the (i. j)th cell. Step4. Again if min (ai. Matrix minima method (Lowest cost entr method) In this method. bj) = ai. If the min (ai . Step5. Step3. Step5. bj) = bj. then the availability of the ith origin is exhausted and demand at the jth destination remains as bj-ai and the ith row is deleted from the table. bj) to this cell. j)th cell. Repeat steps 2. then the availability of the ith origin is exhausted and demand at the jth destination remains as bj-ai and the ith row is deleted from the table. Again if min (ai. bj) to this cell. bj) = bj. with minimum cost can be chosen. If the min (ai . Li ewise consecutive rows get deleted repeating step3 continuously and we stop when all the rows have been deleted. Again if min (ai. 4. Repeat steps 2. bj) = ai. Choose the cell with minimum cost. Write the given transportation problem in tabular form (if not given). Allocate min (ai. anyone of the cell in the Ist column. bj) = ai. allocations are made on the basis of economic desirability. then demand at the jth destination is fulfilled and the availability at the ith origin remains to be ai-bj and the jth column is deleted from the table. Step2. bj) = bj. Column minima method Step1. Allocate min (ai. Li ewise consecutive columns get deleted repeating step3 continuously and we stop when all the columns have been deleted. with minimum cost can be chosen. 3 until all origins are exhausted and all demands are fulfilled. Write the given transportation problem in tabular form (if not given). Step4. If it is not unique. anyone of the cell in the Ist row. then demand at the jth destination is fulfilled and the availability at the ith origin remains to be ai-bj and the jth column is deleted from the table. 3 until first row is deleted. Allocate min (ai. If the min (ai . Suppose it is the (i. If it is not unique. Step2. j)th cell. Then choose the cell with minimum cost in the second row and continue step III until the 2nd row is deleted. Step4. If it is not unique. Choose the cell with minimum cost in the first row. The steps involved in determining an initial solution using least-cost method are as follows: Step1. Suppose it is the (i. 3 until first column is deleted. then the availability of the ith origin is exhausted and demand at the jth destination remains as bj-ai and the ith row is deleted from the table.

To decide the route a traveling executive has to adopt (dealing with the order inn which he/she has to visit different places). The transportation model is concerned with selecting the routes between supply and demand points in order to minimize costs of transportation subject to constraints of supply at any supply point and demand at any demand point.Q-5:Assignment problem: Transportation and assignment models are special purpose algorithms of the linear programming. This is best solved through assignment algorithm. For a multi-plant-multi-mar et company this is useful. 4 x 5 = 20 routes are possible. To decide the transportation of finished goods from different manufacturing plants to the different distribution centres. Now we have just enumerated the different situations where we can ma e use of these models. More effective solution models have been evolved and these are called assignment and transportation models. given cost of job completion for each pair of job machine/person? The objective is minimizing total cost. and supply and demand constraints. how are we to assign different jobs to different persons/machines. . To decide the transportation of finished goods from different manufacturing plants to the different distribution centres. supply of materials from several supply points to several destinations and the li e. the assignment model is used. Uses of Transportation and Assignment Models in Decision Making The broad purposes of Transportation and Assignment models in LPP are just mentioned above. These two are the uses of transportation model. Similarly. The objective is minimizing transportation cost. and 5 regional distribution centres. Assignment model is used in the following: y y To decide the assignment of jobs to persons/machines. Given the transportation costs per load of each of 20 routes between the manufacturing (supply) plants and the regional distribution (demand) centres. For a multi-plant-multi-mar et company this is useful. how many loads can be transported through different routes so as to minimize transportation costs? The answer to this question is obtained easily through the transportation algorithm. The simplex method of Linear Programming Problems(LPP) proves to be inefficient is certain situations li e determining optimum assignment of jobs to persons. Transportation model is used in the following: y y y To decide the transportation of new materials from various centres to different manufacturing plants. In the case of multi-plant company this is highly useful. Assume a company has 4 manufacturing plants with different capacity levels.

Management of the inventories. The scope of inventory management concerns the fine lines between replenishment lead time. cycle counting support etc. Inventory management is primarily about specifying the shape and percentage of stoc ed goods. Similarly the assignment model. It is required at different locations within a facility or within many locations of a supply networ to proceed the regular and planned course of production and stoc of materials. Also may include ABC analysis. In the case of transportation model. Q.6Inventor means a list compiled for some formal purpose. such as the details of an estate going to probate.y To decide the order in which different activities performed on one and the same facility be ta en up. Inventory management involves a retailer see ing to acquire and maintain a proper merchandise assortment while ordering. which is an on-going process as the business needs shift and react to the wider environment. less or more than the number of machines/persons available. inventory forecasting. carrying costs of inventory.Balancing these competing requirements leads to optimal inventory levels. equivalent to the term "stoc " in British English. and this has become the primary meaning of the term in North American English. shipping. set targets. less time consuming and easier than the LPP. especially those held available in stoc by a business. inventory visibility. It also involves systems and processes that identify inventory requirements. This would include the monitoring of material moved into and out of stoc room locations and the reconciling of the inventory balances. the supply quantity may be less or more than the demand. report actual and projected inventory status and handles all functions related to the trac ing and management of material. or the contents of a house let furnished. In accounting. available physical space for inventory. the number of jobs may be equal to. lot trac ing. future inventory price forecasting.  Business inventory  The reasons for keeping stock There are three basic reasons for eeping an inventory: .[1] In the USA and Canada the term has developed from a list of goods and materials to the goods and materials themselves. with the primary objective of determining/controlling stoc levels within the physical distribution function to balance the need for product availability against the need for minimizing stoc holding and handling costs. physical inventory. inventory or stoc is considered an asset. inventory valuation. This remains the prime meaning in British English. provide replenishment techniques. but transportation and assignment models are more effective. In all these cases the simplex method of LPP can be adopted. quality management. replenishment. handling. asset management. and related costs are ept in chec . returns and defective goods and demand forecasting.

it is the available inventory. when he needs it" principle tends to incur lots of costs in terms of logistics. Economies of scale .  Special terms used in dealing with inventor y y y Stock Keeping Unit (SKU) is a unique combination of all the components that are assembled into the purchasable item. y Buffer stock is held in individual workstations against the possibility that the upstream workstation may be a little delayed in long setup or change over time. it is often the wor practice to hold all these stoc s mixed together before or after the sub-process to which they relate. thus inventory. Some plants have centralized stoc holding across sub-processes. any change in the packaging or product is a new SKU. These classifications apply along the whole Supply chain. requires that you maintain certain amounts of inventory to use in this "lead time. ice cream for summer) 5. Buffer/safety stock 2. All these stoc reasons can apply to any owner or product stage." 2.  Typology 1. supply and movements of goods.e. and the new old stock may represent the only market source of a particular item at the present time. from supplier to user at every stage. Time . This level of detailed specification assists in managing inventory. Anticipation stock (Building up extra stock for periods of increased demand . which is due to a particular cause and should be a particular individual's responsibility with inevitable consequences. excluding buffer stock) 3. Where these stoc s contain the same or similar items. Such merchandise may not be produced anymore. movement and storing brings in economies of scale. Uncertainty . Cycle stock (Used in batch processes. Pipeline stock (Goods still in transit or in the process of distribution .1. This stock is then used while that changeover is happening. Because they are mixed up together there is no visual reminder to operators of the adjacent sub-processes or line management of the stoc . This stock can be eliminated by tools like SMED.The time lags present in the supply chain.[2] "New old stock" (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale that was manufactured long ago but that has never been used.Inventories are maintained as buffers to meet uncertainties in demand.have left the factory but not arrived at the customer yet)  Inventory examples . Stockout means running out of the inventory of an SKU. which ma es the situation even more acute. 3. De-coupling (Buffer stock held between the machines in a single process which serves as a buffer for the next one allowing smooth flow of work instead of waiting the previous or next machine in the same process) 4. Therefore. This 'reduces' costs. So bulk buying.Ideal condition of "one unit at a time at a place where a user needs it. not just within a facility or plant.g.

and wholesalers' inventory tends to cluster in warehouses. Its finished good inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers).also have inventories (fixtures. The firm's wor in process includes those materials from the time of release to the wor floor until they become complete and ready for sale to wholesale or retail customers. furniture. Stoc ties up cash and. Reduction and elimination of these inventory 'wait' states is a ey concept in Lean.) that they do not intend to sell. if uncontrolled. Manufacturers'. as well as the complexity of the supply chain.goods ready for sale to customers. filled cans not yet labeled or sub-assemblies of food components.materials and components that have begun their transformation to finished goods.[6] Too big an inventory reduction too quic ly can cause a business to be anorexic. and anything else (solder. This may be vats of prepared food. Examples of case studies are very revealing. . but unless there is a good understanding of the role of inventory and its parameters. it will be impossible to now the actual level of stoc s and therefore impossible to control them. . and an effective business process to support that. distributors'.) that will form part of a finished can. Typical Inventory Management techniques include Pareto Curve ABC Classification[3] and Economic Order Quantity Management.[4] A case study of -curve[5] benefits to one company shows a successful implementation. combining certain aspects of each to create The K Curve Methodology. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. and the way in which it chooses to do so. to grocery stores (retailers).While accountants often discuss inventory in terms of goods for sale. A more sophisticated method ta es these two techniques further. and even perhaps to consumers through arrangements li e factory stores and outlet centers. a company may wish to install a complex inventory system.returned goods that are salable. the system cannot bring the necessary benefits to the organisation in isolation. It may also include finished cans that are not yet pac aged into cartons or pallets. For example.. For example:  Manufacturing A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned. service-providers and not-for-profits . labels. glue. WIP . and consistently show that the improvement of inventory management has two parts: the capability of the organisation to manage inventory. supplies. There are well-proven processes and techniques to assist in . While the reasons for holding stoc were covered earlier. empty cans and their lids (or coils of steel or aluminum for constructing those components).. Finished goods . Goods for resale . organizations manufacturers.. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. most manufacturing organizations usually divide their "goods for sale" inventory into: y y y y Raw materials . Work in process. Unnecessary inventory adds enormously to the wor ing capital tied up in the business.materials and components scheduled for use in making a product..

the gains of jointly producing two or more products in one facility. the burgeoning need for financial reporting after 1900 created unavoidable pressure for financial accounting of stoc and the management need to cost manage products became overshadowed. and the financial reporting definitions of 'cost' have distorted effective management 'cost' accounting since that time. Cost of goods available cost of ending inventory at the end of the period = cost of goods sold The benefit of these formulae is that the first absorbs all overheads of production and raw material costs into a value of inventory for reporting. The second formula then creates the new start point for the next period and gives a figure to be subtracted from the sales price to determine some form of sales-margin figure. A variety of attempts to achieve this were unsuccessful due to the huge overhead of the information processing of the time. This is particularly true of inventory. high-level financial inventory has these two basic formulas. Roots The use of inventory proportionality in the United States is thought to have been inspired by Japanese just-in-time parts inventory management made famous by Toyota Motors in the 1980s. This number tells how much cash/goods are tied up waiting for the process and is a critical measure of process . The managers now needed information on the effect of product-mix decisions on overall profits and therefore needed accurate product-cost information. Inventory turnover ratio (also known as inventory turns) = cost of goods sold / Average Inventory = Cost of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2) ' ( '&( (' & & '& & and its inverse Average Days to Sell Inventory = Number of Days a Year / Inventory Turnover Ratio = 365 days a year / Inventory Turnover Ratio This ratio estimates how many times the inventory turns over a year.[3]  High-level inventory management It seems that around 1880 [8] there was a change in manufacturing practice from companies with relatively homogeneous lines of products to vertically integrated companies with unprecedented diversity in processes and products. it was the need for audited accounts that sealed the fate of managerial cost accounting. which relate to the accounting period: 1. In particular. Those companies (especially in metalwor ing) attempted to achieve success through economies of scope . However. Hence. ' Manufacturing management is more interested in i ve t y tu ve rati or average days t sell i ve t ry since it tells them something about relative inventory levels. The dominance of financial reporting accounting over management accounting remains to this day with few exceptions. Cost of Beginning Inventory at the start of the period + inventory purchases within the period + cost of production within the period = cost of goods available 2.

attempt to minimize on-hand inventory and increase inventory turns. This improvement will have some negative results in the financial reporting. Vendor Managed Inventory (VMI) and Customer Managed Inventory (CMI). so many things that can vary hidden under this appearance of simplicity that a variety of 'adjusting' assumptions may be used. The ratio may not be able to reflect the usability of future production demand.reliability and effectiveness. since the 'value' now stored in the factory as inventory is reduced. in fact. whereas a factory that moves from six turns to twelve turns has probably improved effectiveness by 100%. While these accounting measures of inventory are very useful because of their simplicity. Business models. including Just in Time (JIT) Inventory. So a factory with two inventory turns has six months stoc on hand. These include: y y y y Specific Identification Weighted Average Cost Moving-Average Cost FIFO and LIFO. There are. VMI and CMI have gained considerable attention due to the success of third-party vendors who offer added expertise and nowledge that organizations may not possess.  Accounting for inventory Accountancy Key concepts Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Cash flow management · Chart of accounts · Constant Purchasing Power Accounting · Cost of goods sold · Credit terms · Debits and credits · Doubleentry system · Fair value accounting · FIFO & LIFO · GAAP / IFRS · General ledger · Goodwill · Historical cost · Matching principle · Revenue recognition · Trial balance Fields of accounting Cost · Financial · Forensic · Fund · Management · Mergers and Acquisitions · Tax Financial statements . The methodology applied is based on historical cost of goods sold. as well as customer demand. Inventory management should be forward loo ing. Inventory Turn is a financial accounting tool for evaluating inventory and it is not necessarily a management tool. they are also fraught with the danger of their own assumptions. which is generally not a good figure (depending upon the industry).

with multistage-process companies. since it counts as an asset on the balance sheet. This needs to be valued in the accounts.Statement of Financial Position · Statement of cash flows · Statement of changes in equity · Statement of comprehensive income · Notes · MD&A · XBRL Auditing Auditor's report · Financial audit · GAAS / ISA · Internal audit · Sarbanes Oxley Act Accounting qualifications CA · CPA · CCA · CGA · CMA This box: view · talk · edit Each country has its own rules about accounting for inventory that fit with their financialreporting rules. Today.  Financial accounting An organization's inventory can appear a mixed blessing. which establishes an independent mar et value for the good. Other countries often have similar arrangements but with their own GAAP and national agencies instead. there is much inventory that would once have been finished goods which is now held as 'wor in process' (WIP). Commissioner. such enterprises are quite probably in the minority in the 21st century. as in Thor Power Tool Company v.S. . one-process factories. For example. cost accounting functions internally to an organization and potentially with much greater flexibility. Whereas in the past most enterprises ran simple. Inventory may also cause significant tax expenses. the rules defined by the Financial Accounting Standards Board (FASB) (and others) and enforced by the U. organizations in the U. A discussion of inventory from standard and Theory of Constraints-based (throughput) cost accounting perspective follows some examples and a discussion of inventory from a financial accounting perspective. The internal costing/valuation of inventory can be complex. Where 'one process' factories exist. This somewhat arbitrary 'valuation' of WIP combined with the allocation of overheads to it has led to some unintended and undesirable results. Securities and Exchange Commission (SEC) and other federal and state agencies. there is a mar et for the goods created. but the valuation is a management decision since there is no mar et for the partially finished product. but it also ties up money that could serve for other purposes and requires additional expense for its protection. define inventory to suit their needs within US Generally Accepted Accounting Practices (GAAP). It is intentional that financial accounting uses standards that allow the public to compare firms' performance. depending on particular countries' laws regarding depreciation of inventory.S.

and firms in several ways. Those . in turn. They have not. a company generally reports lower net income and lower boo value. firms use the same efficiencies to downsize. wor ers. few problems arise. For example. Due to LIFO's potential to s ew inventory value. Standard methods continue to emphasize labor efficiency even though that resource now constitutes a (very) small part of cost in most cases. FIFO regards the first unit that arrived in inventory as the first one sold. UK GAAP and IAS have effectively banned LIFO inventory accounting. machinery. When (not if) something goes wrong. Wor ers laid off under those circumstances have even less control over excess inventory and cost efficiencies than their managers. that uses throughput (money for goods sold to customers) in place of output (goods produced that may sell or may boost inventory) and considers labor as a fixed rather than as a variable cost. Unfortunately. This generally results in lower taxation.commodity items that one cannot trac individually. called throughput accounting. Two popular methods that normally exist are: FIFO and LIFO accounting (first in . on taxation. however. found a successor.first out. li e materials and components. throughput accounting focuses attention on the relationships between throughput (revenue or income) on one hand and controllable operating expenses and changes in inventory on the other. rightsize. As long as similar actual and standard conditions obtain.first out). In adverse economic times. Goldratt developed the Theory of Constraints in part to address the costaccounting problems in what he calls the "cost world. the process ta es longer and uses more than the standard labor time. Finished goods inventories remain balance-sheet assets. which vary directly with the quantity produced. due to the effects of inflation.  Standard cost accounting Standard cost accounting uses ratios called efficiencies that compare the labour and materials actually used to produce a good with those that the same goods would have required under "standard" conditions. including buildings. or otherwise reduce their labor force. Increasing inventory requires increased production. last in . Instead of an incentive to reduce labor cost." He offers a substitute. even though s/he has no control over the production requirement or the problem. when labor comprised the most important cost in manufactured goods. LIFO considers the last unit arriving in inventory as the first one sold. which means that processes must operate at higher rates. accountants must choose a method that fits the nature of the sale. standard cost accounting methods developed about 100 years ago. Which method an accountant selects can have a significant effect on net income and boo value and. Using LIFO accounting for inventory. Throughput accounting recognizes only one class of variable costs: the truly variable costs. Standard cost accounting can hurt managers. The manager appears responsible for the excess. a policy decision to increase inventory can harm a manufacturing manager's performance evaluation. but labor-efficiency ratios no longer evaluate managers and wor ers. and many other things in addition to the categories listed here. He defines inventory simply as everything the organization owns that it plans to sell.  Theory of constraints cost accounting Eliyahu M. Many financial and cost accountants have agreed for many years on the desirability of replacing standard cost accounting.

It also includes computer or consumer-electronic equipment that is obsolete or discontinued and whose manufacturer is unable to support it. 3 months left to expiry).8: The scheme of any arrangement or proposal for a merger is the heart of the process and has to be drafted with care.[9] In 2001.who have little or no control over their situations. inventory credit is a potentially important way of overcoming financing constraints.g. Appointed date of merger . It is.relationships direct attention to the constraints or bottlenec s that prevent the system from producing more throughput. for example.  National accounts Inventories also play an important role in national accounts and the analysis of the business cycle. or have reached a date in advance of expiry at which the planned mar et will no longer purchase them (e. Ban s also face problems in valuing the inventory. One current example of distressed inventory is the VHS format. It is designed to suit the terms and conditions relevant to the proposal but it should generally contain the following information as per the requirements of sec.  Inventory credit Inventory credit refers to the use of stoc . and old newspapers or magazines. 394 of the companies Act. Some short-term macroeconomic fluctuations are attributed to the inventory cycle. 1956: 1. Where ban s may be reluctant to accept traditional collateral.  Distressed inventory Also nown as distressed or expired stoc . used with Parmesan cheese in Italy. [10] This is one of the biggest inventory write-offs in business history. archaeological evidence suggests that it was practiced in Ancient Rome. Particulars about transferor and transferee companies 2. This is not a new concept. distressed inventory is inventory whose potential to be sold at a normal cost has passed or will soon pass. as collateral to raise finance. The possibility of sudden falls in commodity prices means that they are usually reluctant to lend more than about 60% of the value of the inventory at the time of the loan. In certain industries it could also mean that the stoc is or will soon be impossible to sell. Obtaining finance against stoc s of a wide range of products held in a bonded warehouse is common in much of the world.25 billion due to duplicate orders. or inventory. There is no specific form prescribed for the scheme. Cisco wrote off inventory worth US \$2.[11] Inventory credit on the basis of stored agricultural produce is widely used in Latin American countries and in some Asian countries. this implies the existence of a reliable networ of certified warehouses. Q. rather than to people .[12] A precondition for such credit is that ban s must be confident that the stored product will be available if they need to call on the collateral. for example in developing countries where land title may be lac ing. clothing that is defective or out of fashion. Examples of distressed inventory include products that have reached their expiry date.

8. Gratuity fund. Commitment of transferor and Transferee Company towards ma ing an application U/S 394 and other applicable provisions of companies Act. Transferor company¶s staff. 1956 to their respective High court. Broadly there are three(3) methods used for valuation of business: 1. wor men. Effect of non receipt of approvals/sanctions etc. Proposed share exchange ratio. employees and status of provident fund. Valuation is the means to assess the worth of a company which is subject to merger or ta eover so that consideration amount can be quantified and the price of one company for other can be fixed. Description of power of delegates of Transferee Company to give effect to the scheme. 15. 16. Qualifications attached to the scheme which requires approval of different agencies. current assets. Effective date when scheme will came into effect 5. Terms of transfer of assets and liabilities from transferor company to transferee company 4. superannuation fund or any other special funds created for the purpose of employees. 13. Terms and conditions of carrying business by transferor company between appointed date and effective date 7. 14. any condition attached thereto and the fractional share certificate to be issued. Valuation of both companies subject to business combination is required for fixing the consideration amount to be paid in the form of exchange of share. 12. Deductions will have to be made for arrears of preference dividend. Such valuation helps in determining the value of shares of acquired company as well as acquiring company to safeguard the interest of shareholders of both the companies. contingent and other accounting entries requiring special treatment. Miscellaneous provisions covering Income Tax dues. Share capital of Transferor Company and Transferee Company specifying authorized. arrears of depreciation etc. there may be same modifications in this method and fixed assets may be ta en at current realizable value . Issue of shares by transferee company 10. 9. Transferor and transferee companies consent to ma e changes in the scheme as ordered by the court or other authorities under law and exercising the powers on behalf of the companies by their respective boards. issued. However. Treatment of specified properties or rights of transferor company 6. subscribed and paid up capital. borrowing and liabilities including both current and li ely contingent liability and preference share capital). 11. 17.3. Net Value Asset (NAV) Method NAV is the sum total of value of asserts (fixed assets. Enhancement of borrowing limits of transferee company when scheme coming into effect. Treatment of expenses connected with the scheme. investment on the date of Balance sheet less all debts. Valuation in a merger: Determination of share exchange ratio An important aspect of merger procedure relates to valuation of business relates to valuation of business in order to determine share exchange ratio in merger.

Employees union vs. and also summarized by the Apex court in the case of Hindustan Levers. Earnings of the company for the next two years are projected (by valuation experts) and simple or weighted average of these profits is computed. The problem of valuation has been dealt with by Weinberg and Blan (1971) by giving the relevant factors to be ta en into account while determining the final share exchange ratio. Thus. are to be exchanged for how many shares of amalgamated company. it must be valued on independent basis without considering benefits on account of merger. While the past financial performance serves as guide. the determination of share exchange ratio i. Profits of both companies¶ should be determined after ensuring that similar policies are used in various areas li e depreciation. Also. real estate etc. Fixation of the value of different types of equity shares. Hindustan Lever Ltd. These relevant factors has been enumerated by Gujarat High court in Bihari Mills Ltd.) replacement cost (plant and machinery) or scrap value (obsolete machinery). 1. The NAV. While determining capitalization rate. so arrived at. Yield Value Method This method also called profit earning capacity method is based on the assessment of future maintainable earnings of the business.) to get NAV per share. (1995) as under. The stoc exchange prices of the shares of the companies before the commencement of negotiations or the announcement of the bid. These net profits are divided by appropriate capitalization rate to get true value of business. is basically an exercise in valuation of shares of two or more of amalgamating company. While determining operating profits of the business. it is the future maintainable profits that have to be considered. is divided by fully diluted equity (after considering equity increases on account of warrant conversion etc. The average of high or low values and closing prices over a specified previous period is ta en to be representative value per share. a business ct with established brands and excellent trac record of growth and diverse produ portfolio will get a lower capitalization rate and consequently higher valuation where as a cyclical business or a business dependent on seasonal factors will get a higher capitalization rate. Valuation of assets 2. Ascertainment of liabilities 3.e. This figure divided by equity value gives value per share. Now. . due regard has to be given to inherent ris attribute to each business.. 3. stoc valuation etc.(especially investments. NAV = All assets (value by appropriation method ± all liabilities ± preference shares) / Fully diluted equity shares 2. The three steps necessary for valuing share are: 1. how many shares of amalgamating company. past or future profits need to be adjusted for extra ordinary income or loss not li ely to recur in future. Market Value Method This method is applicable only in case where share of companies are listed on a recognized stoc exchange.

(ratio of after tax earnings to divided paid during the year) for the present dividends of the two companies. that the valuation agreed upon has been unfair. Valuation can be done on basis of asset value. if reasonable estimation of future profits and dividend is not possible due to wide fluctuations in profits and uncertain conditions. 6. including arriving at the (bac of the) queue. company incurring expenses disproportionate to the commercial venture. In computing yields. The past history of the prices of two companies. or queues. According to Delhi High Court statement. The dividends presently paid on the shares of two companies. The fact that the dividend of one company is better covered than the other is a factor which has to be compensated to same extent. 7. Mahadeo Jalan (1972) 86 ITR 621 (SC). The cover. then estimate of share value before the set-bac and proportionate fall in price of quoted shares of companies which have suffered similar reverses should be considered If company is ripe for winding up.7: Queueing theory is the mathematical study of waiting lines. possibly to reduce income tax liability) If lower dividend or profits are due to temporary reasons. It is often difficult to induce a shareholder to agree to a merger if it involves a reduction in his dividend income. it cannot be said. The value of net assets of the two companies. and being served at the front of . 4. 5. If result of two methods differs. The relative gearing of the shares of the two companies. There are bound to be difference of opinion as to what the correct value of the shares of the company is.g. The voting strength in the company of shareholder of the two companies. The gearing of an ordinary share is the ratio of borrowings to equity capital. 8. Supreme Court has evolved the following guidelines and aspects which should be considered: y y Regard should be had to price of shares prevailing in stoc mar et Profit earning capacity (yield method) or dividend declared by the company (dividend method) should be considered.´ In CWT vs. a golden mean should be found. 3. ³The valuation of shares is a technical matter which requires considerable s ills and expertise. y y y y Q. abnormal expenses will be added bac to calculate µyield¶ (e. no rules framed specially for the wor ing out of share exchange ratio in case of amalgamations. The theory enables mathematical analysis of several related processes. waiting in the queue (essentially a storage process). The relative growth prospects of the two companies.2. brea up value method to determine what would be realized in winding up process should be considered. If it is possible to the value the shares in a manner difference from the one adopted in the given case. There are however.

the queue. The theory permits the derivation and calculation of several performance measures including the average waiting time in the queue or the system, the expected number waiting or receiving service, and the probability of encountering the system in certain states, such as empty, full, having an available server or having to wait a certain time to be served. Queueing theory has applications in diverse fields,[1] including telecommunications,[2] traffic engineering, computing[3] and the design of factories, shops, offices and hospitals.

Overview
The word queue comes, via French, from the Latin cauda, meaning tail. The spelling "queueing" over "queuing" is typically encountered in the academic research field. In fact, one of the flagship journals of the profession is named "Queueing Systems". Queueing theory is generally considered a branch of operations research because the results are often used when ma ing business decisions about the resources needed to provide service. It is applicable in a wide variety of situations that may be encountered in business, commerce, industry, healthcare,[5] public service and engineering. Applications are frequently encountered in customer service situations as well as transport and telecommunication. Queueing theory is directly applicable to intelligent transportation systems, call centers, PABXs, networ s, telecommunications, server queueing, mainframe computer of telecommunications terminals, advanced telecommunications systems, and traffic flow. Notation for describing the characteristics of a queueing model was first suggested by David G. Kendall in 1953. Kendall's notation introduced an A/B/C queueing notation that can be found in all standard modern wor s on queueing theory, for example, Tijms.[6] The A/B/C notation designates a queueing system having A as interarrival time distribution, B as service time distribution, and C as number of servers. For example, "G/D/1" would indicate a General (may be anything) arrival process, a Deterministic (constant time) service process and a single server. More details on this notation are given in the article about queueing models.

 History
Agner Krarup Erlang, a Danish engineer who wor ed for the Copenhagen Telephone Exchange, published the first paper on queueing theory in 1909. [7] David G. Kendall introduced an A/B/C queueing notation in 1953. Important wor on queueing theory used in modern pac et switching networ s was performed in the early 1960s by Leonard Kleinroc .

 Application to telephony
The public switched telephone networ (PSTN) is designed to accommodate the offered traffic intensity with only a small loss. The performance of loss systems is quantified by their grade of service, driven by the assumption that if sufficient capacity is not available, the call is refused and lost.[8] Alternatively, overflow systems ma e use of alternative routes to divert calls via different paths ² even these systems have a finite traffic carrying capacity.[8]

However, the use of queueing in PSTNs allows the systems to queue their customers' requests until free resources become available. This means that if traffic intensity levels exceed available capacity, customer's calls are not lost; customers instead wait until they can be served.[9] This method is used in queueing customers for the next available operator. A queueing discipline determines the manner in which the exchange handles calls from customers.[9] It defines the way they will be served, the order in which they are served, and [9][10] the way in which resources are divided among the customers. Here are details of four queueing disciplines:
Firs in firs out This principle states that customers are serve one at a time and that the customer that has been waiting the longest is served first.[10] Last in first out This principle also serves customers one at a time however the customer with the shortest waiting time will be served first.[10] Also known as a stack. Processor sharing Customers are served e ually. Network capacity is shared between customers and they all effectively e perience the same delay.[10] Priority Customers with high priority are served first.[10]
2 3 1 0 ) )

Queueing is handled by control processes within exchanges, which can be modelled using state equations.[9][10] Queueing systems use a particular form of state equations known as a Markov chain that models the system in each state.[9] Incoming traffic to these systems is modelled via a Poisson distribution and is subject to Erlang¶s queueing theory assumptions vi .[8]
y y y y
[8] Call arrivals and departures are random and independent events. Pur - han traff [8] Stat t al qu l br um Probabilities within the system do not change. Full ava lab l ty All incoming traffic can be routed to any other customer within the network.[8] l ar d a oon a rv r ar fr .[8] Cong t on

Classic queueing theory involves complex calculations to determine waiting time, service time, server utili ation and other metrics that are used to measure queueing performance.[9][10]

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Networks of queues are systems which contain an arbitrary, but finite, numberm of queues. Customers, sometimes of different classes,[11] travel through the network and are served at the nodes. The state of a network can be described by a vector , where ki is the

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number of customers at queue i. In open networ s, customers can join and leave the system, whereas in closed networ s the total number of customers within the system remains fixed. The first significant result in the area was Jac son networ s, for which an efficient product form equilibrium distribution exists.

 Role of Poisson process, exponential distributions
A useful queueing model represents a real-life system with sufficient accuracy and is analytically tractable. A queueing model based on the Poisson process and its companion exponential probability distribution often meets these two requirements. A Poisson process models random events (such as a customer arrival, a request for action from a web server, or the completion of the actions requested of a web server) as emanating from a memoryless process. That is, the length of the time interval from the current time to the occurrence of the next event does not depend upon the time of occurrence of the last event. In the Poisson probability distribution, the observer records the number of events that occur in a time interval of fixed length. In the (negative) exponential probability distribution, the observer records the length of the time interval between consecutive events. In both, the underlying physical process is memoryless. Models based on the Poisson process often respond to inputs from the environment in a manner that mimics the response of the system being modeled to those same inputs. The analytically tractable models that result yield both information about the system being modeled and the form of their solution. Even a queueing model based on the Poisson process that does a relatively poor job of mimic ing detailed system performance can be useful. The fact that such models often give "worst-case" scenario evaluations appeals to system designers who prefer to include a safety factor in their designs. Also, the form of the solution of models based on the Poisson process often provides insight into the form of the solution to a queueing problem whose detailed behavior is poorly mimic ed. As a result, queueing models are frequently modeled as Poisson processes through the use of the exponential distribution.

 Limitations of queueing theory
The assumptions of classical queueing theory may be too restrictive to be able to model realworld situations exactly. The complexity of production lines with product-specific characteristics cannot be handled with those models. Therefore specialized tools have been developed to simulate, analyze, visualize and optimize time dynamic queueing line behavior. For example; the mathematical models often assume infinite numbers of customers, infinite queue capacity, or no bounds on inter-arrival or service times, when it is quite apparent that these bounds must exist in reality. Often, although the bounds do exist, they can be safely ignored because the differences between the real-world and theory is not statistically significant, as the probability that such boundary situations might occur is remote compared to the expected normal situation. Furthermore, several studies show the robustness of queueing models outside their assumptions. In other cases the theoretical solution may either prove intractable or insufficiently informative to be useful.

Increases coordination of tas s as technological relationship between the activities suggests which activities can run simultaneously and which should succeed others. an important aid to planning. See networ traffic simulation.9:Critical Path Analysis: Critical path analysis.e. Each and every activity compromising the project is identified and recorded. PERT prepares networ from events while CPM builds if from activities) PERT provides for an allowance for uncertainty while CPM does not (i. y Forces through pre-planning. Is a synthesis of two independent techniques: Programme Evaluation and Review Technique (PERT) and Critical Path Method (CPM). PERT ma es three time estimates for each activity while CPM ma es one time estimate) Activity time in CPM technique are related to costs while it is not so in PERT since it is event oriented y y Significance of critical path: Critical path analysis offers several advantages. scheduling and coordinating the activities if large scale projects. although they are often scenario-specific because they generally consist of computer simulations or analysis of experimental data. The two methods have many features in common and are now combined into a technique called Critical Path Analysis (CPA) or Networ Analysis. Facilitates progress reporting and limits unnecessary discussion at the progress meetings. Nothing is left to memory or chance which prevents crises in scheduling. Defines areas of responsibility of different departmental heads for timely execution of the project. Indicates optimal start and finish times of each activity of the project. Though the two techniques were developed independently. Helps computations of different project duration¶s for different level of resources and thereby select a plan that minimizes total project cost.Alternative means of analysis have thus been devised in order to provide some insight into problems that do not fall under the scope of queueing theory. y y y y y .e. Q. There are three basic different between a PERT networ and CPM networ : y PERT is event oriented while CPM is activity oriented (i. they are only superficially different.

Navy Special Projects Office in 1957 to support the U. It is applied to very large-scale. is a model for project management designed to analyze and represent the tasks involved in completing a given project. y PERT is a method to analyze the involved tas s in completing a given project. For example in construction project. y A project. one-time. Even the preliminaries-mere listing of the activities-ma e the operating personnel: y y Thin of details about the project well in advance. complex.S.S. It was developed for the U. An activity should represent an operation or set of operations. An example of this was for the 1968 Winter Olympics in Grenoble which applied PERT from 1965 until the opening of the 1968 Games. must be torn into a set of identifiable activities. non-routine infrastructure and Research and Development projects. and is used more in projects where time. Improve upon the original plans even before networ is formally drawn and analyzed. Navy's Polaris nuclear submarine project. A Project comprises a series of activities and the identification of the individual activities requires nowledge and experience of the men responsible for the planning of the project. It is more of an event-oriented technique rather than start. plumbing is considered as one activity while wiring can be considered as another activity since the first activity requires plumbers and the second activity needs electricians. It is commonly used in conjunction with the critical path method or CPM. There are no set rules but general guidelines are as under: y An activity should represent the smallest unit of the operation or set of operations over which management desires control. Enables the plan to be revised in accordance with changes/changing circumstances. [2] . commonly abbreviated PERT. which can be performed using a particular ind of equipment or a special s ill. PERT was developed primarily to simplify the planning and scheduling of large and complex projects.and completion-oriented. is the major factor.y y y Identifies troubles spot often in advance and apply remedial measures. Observe critically the way in which the various activities interact or compete for scarce resources. rather than cost. The Program (or Project) Evaluation and Review Technique. and identifying the minimum time needed to complete the total project. therefore. especially the time needed to complete each tas . Helps to exercise ³control by exception´ and prevents cost overruns.[1] It was able to incorporate uncertainty by ma ing it possible to schedule a project while not nowing precisely the details and durations of all the activities.

any time delays along the critical path will delay the reaching of the terminal event by at least the same amount.50 Expected time d y y Float o Slack is the amount of time that a task in a project network can be delayed without causing a delay .y y y y y y  Implementation The first step to scheduling the project is to determine the tas s that the project requires and the order in which they must be completed. Some tas s can be done concurrently (A and B) while others cannot be done until their predecessor tas is complete (C cannot begin until A is complete). In the following example there are seven tas s.g. negative slack would indicate behind schedule. each tas has three time estimates: the optimistic time estimate (O). The order may be easy to record for some tas s (e.17 4. Slack: the slack of an event is a measure of the excess time and resources available in achieving this event. Additionally. Many times.Subsequent tasks (free float) or Project Completion (total float) Critical Path: the longest possible continuous pathway taken from the initial event to the terminal event. and. but there are only enough bulldozers to do one). Critical Activity: An activity that has total float equal to zero. C D 2 3 4 4 4 3 4 5 5 6 5 4 6 9 7 10 7 8 4.33 5. the time estimates usually reflect the normal. non-rushed time. the time required to execute the tas can be reduced for an additional cost or a reduction in the quality. the land must be graded before the foundation can be laid) while difficult for others (There are two areas that need to be graded. Additionally. Time estimates Activity Predecessor Opt. and the pessimistic time estimate (P). Lag ti e: the earliest time by which a successor event can follow a specific PERT event. labeled A through G. Lead ti e: the time by which a predecessor event must be completed in order to allow sufficient time for the activities that must elapse before a specific PERT event reaches completion. and zero slack would indicate on schedule.00 5. It determines the total calendar time required for the project.17 6. Activity with zero float does not mean it is on the critical path. (O) Normal (M) Pess. Fast tracking: performing more critical activities in parallel Crashing critical path: Shortening duration of critical activities b c a . (P) A B C D E F A A B. Positive slack would indicate ahead o schedule.33 5. the most li ely or normal time estimate (M). The expected time (TE) is computed using the formula (O + 4M + P) ÷ 6. therefore. When building a house.

and take up no additional space on the work calendar. Note (1) the critical path is highlighted. A network diagram can be created by hand or by using diagram software. Note (1) the critical path is in red. (2) the slack is the black lines connected to non-critical activities.G E 3 5 8 5. though it can be observed on tasks 3 and 7 (b and f). (3) since weekends are indicated by a thin vertical line. To create an AON diagram. it is recommended (but not required) to start with a node named start. some bars on the Gantt chart are longer if they cut through a weekend. e A Gantt chart created using OmniPlan. Activity on node diagrams are generally easier to create and interpret. one can draw a Gantt chart or a network diagram. (2) the slack is not specifically indicated on task 5 (d).17 Once this step is complete. A Gantt chart created using Microsoft Project (MSP). (3) since Saturday and Sunday are not work days and are thus e cluded from the schedule. bars on the Gantt chart are not longer or shorter when they do or don't carry over a weekend. There are two types of network diagrams. activity on arrow (AOA) and activity on node (AON). This "activity" has a .

LF. Then you draw each activity that does not have a predecessor activity (a and b in this example) and connect them with an arrow from start to each node. ES. it is recommended (but again not required) to connect them to a node labeled fi ish. Next. Activity f has d as a predecessor activity. f A network diagram created using Microsoft Project (MSP). 3. LS.duration of zero (0). 5. Since there are no activities that come after f or g. signifying that e cannot begin until both b and c have been completed. their nodes are drawn with arrows coming from a. 2. and slack. Activity e is listed with b and c as predecessor activities. EF. duration. The most common information shown is: 1. 4. an arrow is drawn from e to g. The activity name The normal duration time The early start time (ES) The early finish time (EF) The late start time (LS) The late finish time (LF) The slack . 7. 6. it can be expanded to display more information. so an arrow is drawn connecting the activities. Note the critical path is in red. since both c and d list a as a predecessor activity. however. Li ewise. By itself. A node like this one (from Microsoft Visio) can be used to display the activity name. so node e is drawn with arrows coming from both b and c. the networ diagram pictured above does not give much more information than a Gantt chart.

The ES for c is four. y y y y y y y y y The LF for finish is equal to the EF (19. The duration (6. The ES for d is four.34 work days. Since b has an EF of 5. Finish is a milestone (and therefore has a duration of zero). The first step is to determine the ES and EF. the EF is also zero.33 work days) is added to the ES to get an EF of 10. The duration (4. The duration (5. for which the ES is zero (0). The duration (4 work days) is subtracted from the LF to get an LS of 0 work days. This will be used as the LF for b and c. The LF for e is 14. The critical path is the path that ta es the longest to complete.33 and c has an EF of 9. The LF for b is 9. The LF for g is 19. The duration (5.51 work days.51 work days. The next step is to determine the critical path and if any activities have slac . add the tas .17.51.84 work days. the ES of e is 9.83 and g has an EF of 19.34 work days.33 work days) is added to the ES to get an EF of 5. The duration (5. The LF for c is 9. The ES for b is zero. This will be used as the LF for f and g.51.17 work days) is subtracted from the LF to get an LS of 9. To determine the path times.5 work days) is added to the ES to get an EF of 14. The LF is defined as the minimum LS of all successor activities. unless the activity is the last activity.17 work days) is added to the ES to get an EF of 9. The duration (5.33. The LS is the LF minus the tas duration (LS = LF .01 work days.17 work days) is added to the ES to get an EF of 14. This EF is used as the ES for c and d. the ES of finish is 19. Since c has an LS of 4 work days and d has an LS of 8. Since the duration is zero.17 work days.83.51.33.17 work days.68 work days. The duration (4. The duration (5. This EF is used as the ES for .33.17.duration). Since a has an LS of 0 work days and b has an LS of 3.01 work days.51 work days) since it is the last activity in the project. The duration (6. The ES for e is the greatest EF of its predecessor activities (b and c).51. g Barring any unforeseen events. the project should ta e 19. The ES for a is zero.In order to determine this information it is assumed that the activities and normal duration times are given. The duration (5. The LF for start is the minimum LS of its successor activities. The duration (5.17 work days) is subtracted from the LF to get an LS of 4 work days. The LF for d is 15. the LS is also 19.17. This EF is used as the ES for a and b. The ES for finish is the greatest EF of its predecessor activities (f and g).34. This will be used as the LF for e. This EF is used as the ES for g.5 work days) is subtracted from the LF to get an LS of 15. the LS is 0 work days. The duration (5. Since the duration is zero.51 wor days to complete.17 work days. This will be used as the LF for d.33 work days) is subtracted from the LF to get an LS of 8. so the EF is also 19. The ES for g is 14.17 work days) is subtracted from the LF to get an LS of 14.68 work days. The LF for f is 19. The duration (4 work days) is added to the ES to get an EF of four. The next step is to determine the late start (LS) and late finish (LF) of each activity. This will eventually show if there are activities that have slac . for which the LF equals the EF. the LF for a is 4 work days. unless the activity in question is the first activity.84 work days. The EF is the ES plus the tas duration (EF = ES + duration).33 work days) is subtracted from the LF to get an LS of 3. Since f has an EF of 14.17 work days) is added to the ES to get an EF of 19. y y y y y y y y y The ES for start is zero since it is the first activity. The ES for f is 10. The ES is defined as the maximum EF of all predecessor activities.51 work days.34. The LF for a is the minimum LS of its successor activities.

For example.34 wor days each).14. so the slack is 4.51 work days.34 = 0 o LFg . d and f can be delayed 2.33.68 work days. which is slightly less than the time of the new critical path. let's say that activities d and f ta e their pessimistic (b) times to complete instead of their expected (TE) times. activity d or activity f can be delayed 4. slac = LF .51 .EF or slac = LS . It is important to note that there can be more than one critical path (in a project more complex than this example) or that the critical path can change.51 = 0 Activity b has an LF of 9. y y y y y Start and finish are milestones and by definition have no duration.83 work days. The duration of path aceg is 19. Activities that are on the critical path have a slac of zero (0). if activity c can be reduced to one wor day. The activities on the critical path by definition have a slack of zero.34 wor days.68 work days. Assuming these scenarios do not happen. Activities that have slac can be delayed without changing the overall time of the project.34 .4 = 0 o LFc .durations for all available paths. Activity f has an LF of 19. so the slack is 4.EFa = 4 . activity b can be delayed almost 4 wor days without delaying the project.51 and an EF of 14. the slac for each activity can now be determined. y y y The duration of path adf is 14.84 work days. it is always a good idea to check the math anyway when drawing by hand.33. Therefore.67 wor days). beg (15.9. however.EFg = 19.83. therefore they can have no slack (0 work days).EFe = 14. The duration of path beg is 15. . o LFa . On the other hand. Li ewise.01 and an EF of 10.EFc = 9. the path time for aceg is reduced to 15.ES. The critical path is aceg and the critical time is 19.67 work days.17 and an EF of 5. Activity d has an LF of 15.19. The critical path is now adf and the critical time is 22 wor days.68 wor days without delaying the project (alternatively. Slac is computed in one of two ways. so the slack is 3.17 = 0 o LFe .51 wor days.17 .

late start.A completed network diagram created using Microsoft Visio. The large amount of project data can be organized & presented in diagram for use in decision making. t sqi q h r p v u i h . Note the critical path is in red. [ di ] Ad y y y y y PERT chart e plicitly defines and makes visible dependencies (precedence relationships) between the BS elements PERT facilitates identification of the critical path and makes this visible PERT facilitates identification of early start. PERT provides for potentially reduced project duration due to better understanding of dependencies leading to improved overlapping of activities and tasks where feasible. and slack for each activity.

[1] The output can be an action or an opinion of choice. Some research using naturalistic methods shows. higher sta es. From a psychological perspective.[2] Yet. can be based on explicit assumptions or tacit assumptions. Another goal might be to just find the best alternative or to determine the relative total priority of each alternative (for instance. however. that in situations with higher time pressure.g. Then the problem might be to ran these alternatives in terms of how attractive they are to the decision ma er(s) when all the criteria are considered simultaneously. the analysis of individual decisions is concerned with the logic of decision ma ing and rationality and the invariant choice it leads to. the decision ma ing process must be regarded as a continuous process integrated in the interaction with the environment. Every decision making process produces a final choice. experts use intuitive decision ma ing rather than structured approaches. if alternatives represent projects competing for funds) when all the criteria are considered simultaneously. A major part of decision ma ing involves the analysis of a finite set of alternatives described in terms of some evaluative criteria. Human performance in decision terms has been the subject of active research from several perspectives. This area of . Disadvantages y y y y There can be potentially hundreds or thousands of activities and individual dependency relationships The network charts tend to be large and unwieldy requiring several pages to print and requiring special size paper The lack of a timeframe on most PERT/CPM charts makes it harder to show status although colours can help (e. following a recognition primed decision approach to fit a set of indicators into the expert's experience and immediately arrive at a satisfactory course of action without weighing alternatives. it might be regarded as a problem solving activity which is terminated when a satisfactory solution is reached. Logical decision ma ing is an important part of all science-based professions. medical decision ma ing often involves ma ing a diagnosis and selecting an appropriate treatment. decision ma ing is a reasoning or emotional process which can be rational or irrational. at another level. Therefore. it is necessary to examine individual decisions in the context of a set of needs. However.10: Decision making can be regarded as the mental processes (cognitive process) resulting in the selection of a course of action among several alternative scenarios. specific colour for completed nodes) When the PERT/CPM charts become unwieldy. Solving such problems is the focus of multi-criteria decision analysis (MCDA) also nown as multi-criteria decision ma ing (MCDM). From a normative perspective. These criteria may be benefit or cost in nature. they are no longer used to manage the project. From a cognitive perspective. where specialists apply their nowledge in a given area to ma ing informed decisions. or increased ambiguities. Decision Analysis. recognized and included uncertainties with a structured and rationally justifiable method of decision ma ing since its conception in 1964. Recent robust decision efforts have formally integrated uncertainty into the decision ma ing process. For example. Q.. preferences an individual has and values they see .

and additional actions are ta en to prevent any adverse consequences from becoming problems and starting both systems (problem analysis and decision ma ing) all over again  There are steps that are generally followed that result in a decision model that can be used to determine an optimal production plan.[5] w  Everyday techniques Some of the decision ma ing techniques people use in everyday life include: y y y y y y Pros and Cons: Listing the advantages and disadvantages of each option. cutting a deck of playing cards. revelation. just following orders Flipism: Flipping a coin.  Problem Analysis vs Decision Ma ing It is important to differentiate between problem analysis and decision ma ing. or other forms of divination . is still highly debated as there are many MCDA / MCDM methods which may yield very different results when they are applied on exactly the same data. and other random or coincidence methods Prayer. augurs.decision ma ing.[3] This leads to the formulation of a decision ma ing paradox. popularized by Plato and Benjamin Franklin Simple Prioritization: Choosing the alternative with the highest probability-weighted utility for each alternative (see Decision Analysis) Satisficing: using the first acceptable option found Acquiesce to a person in authority or an "expert". what should the results be against what they actually are  Problems are merely deviations from performance standards  Problem must be precisely identified and described  Problems are caused by some change from a distinctive feature  Something can always be used to distinguish between what has and hasn't been effected by a cause  Causes to problems can be deducted from relevant changes found in analyzing the problem  Most li ely cause to a problem is the one that exactly explains all the facts Decision Making  Objectives must first be established  Objectives must be classified and placed in order of importance  Alternative actions must be developed  The alternative must be evaluated against all the objectives  The alternative that is able to achieve all the objectives is the tentative decision  The tentative decision is evaluated for more possible consequences  The decisive actions are ta en. although it is very old and has attracted the interest of many researchers and practitioners.[4] Problem Analysis  Analyze performance. The concepts are completely separate from one another. Problem analysis must be done first. then the information gathered in that process may be used towards decision ma ing. tarot cards. astrology.

Group members eventually wor it out. Q. while justifying themselves that it was the right decision. The sixth step .Learn from. there are four stages that should be involved in all group decision ma ing. The third step . or sometimes called phases. are important for the decisionma ing process to begin Orientation stage. This will enable decision ma ers to see exactly what they are trying to accomplish and eep them on a specific path. is a time-varying random phenomenon for which a specific . The first step . This will help decision ma ers have actual evidence to help them come up with a solution.Once group members become familiar with each other. This step allows you to see what you did right and wrong when coming up. Conflict stage. named after the Russian mathematician Andrey Mar ov.This phase is where members meet for the first time and start to get to now each other. and is a solution that everyone can agree with. Once the decision is pic ed. The seventh step . Decision-Ma ing Stages Developed by B.List pros and cons of each alternative.Ma e the decision.The group begins to clear up vague opinions by tal ing about them.11In probability theory and statistics. These stages. ma ing your decision easier. With the list of pros and cons.Gather data.Immediately ta e action. you can eliminate the solutions that have more cons than pros. you should implement it right away. The fifth step . Reinforcement stage. and reflect on the decision ma ing. and putting the decision to use.Members finally ma e a decision. Once you analyze each solution. Emergence stage. a Markov process. disputes. Coming up with more than one solution ables you to see which one can actually wor . Aubrey Fisher. there are several steps one can ta e to ensure the best possible solutions will be decided.Brainstorm to develop alternatives. The fourth step . These steps are put into seven effective ways to go about this decision ma ing process (McMahon 2007). little fights and arguments occur. you should pic the one that has many pros (or the pros that are most significant).Outline your goal and outcome. The second step . x y  Decision-Ma ing Steps When in an organization and faced with a difficult decision.

. This captures the idea that the future state is independent of its past states conditionally on the present state (i.ab initio. For      . One simple instance relates to a stochastic process whose states X can take on a discrete set of values. may be shown (mathematically) to have theMarkov property and as a consequence to have the properties that can be deduced from this for all Markov processes. the term Markov chain is used to mean a Markov process which has a discrete (finite or countable) state-space. if the condition holds for all sets of values ( . and     Then the Markov property holds. The description here is the same irrespective of whether the time-index is either a continuous variable or a discrete variable.. more sophisticated mathematics is required as described in the article Markov property. x(t) ). a discrete-time Markov Chain)[2] although some authors use the same terminology where "time" can take continuous values. Consider any set of "past times" ( . and for all sets of times. The states vary with time t and hence the values are denoted by X(t). The interpretation of this is that the conditional probability does not depend on any of the past values ( . p2..[3] Also see continuous-time Markov process. and any "future time" t. apparently non-Markovian processes may still have Markovian representations. A stochastic process.       [ di ] rk i r pr i In some cases. For certain types of stochastic processes it is simple to formulate the condition specifying whether the Markov property holds while. is one for which conditional on t pr sent state of t e system.. any "present time" s...x(p2). its f t re and past are independent. x(p1).property (the Markov property) holds. d epends only on the present state). In a common description.. and the process is a Markov process. defined via a separate argument. where each of these times is within the range for which the stochastic process is defined. p1).e. constructed by expanding the concept of the 'current' and 'future' states. a stochastic model for that process. a stochastic process with the Markov property. for others. . Usually a Markov chain would be defined for a discrete set of times (i. x(s).e. x(p1) ). Of more practical importance is the use of the assumption that the Markov property holds for a certain random process in order to construct. assuming that the Markov property holds is one of a limited number of simple ways of introducing statistical dependence intoa model for a stochastic process in such a way that allows the strength of dependence at different lags to decline as the lag increases.. or memorylessness. Often.x(p2). In modelling terms.[1] Markov processes arise in probability and statistics in one of two ways.

X3. with the Markov property. e hibiting the Markov property): the ne t state depends only on the current state and not on the entire past. then it is a Markovian representation of X. It is possible to construct a chain (Yn) from (Xn) which has the 'classical' Markov property as follows: Let Yn = (Xn. The possible values of Xi form a countable set S called the state space of the chain. this takes the form: If Y has the Markov property. Markov chains are often described by a directed graph. the future state depends on the past m states. Hi her-order Markov processes are defined analogously. Markov chains have many applications as statistical models of real-world processes.example.12:A Marko hain... X2. the ordered m-tuple of X values. namely that.  Variations d     y y Continuous-time Markov processes have a continuous inde . f y A Marko chain of ord r m (or a Markov chain with memory m) where m is finite. is a process satisfying In other words. is a mathematical system that undergoes transitions from one state to another (from a finite or countable number of possible states) in a chainlike manner.e. given the present state. In this case. X is also called a second-order Markov process. Ti -ho o n ous Marko hains (or stationary Marko chains) are processes where  for all n.. Xn m+1). where the edges are labeled by the probabilities of going from one state to the other states. the future and past states are independent. Xn 1. Then define a process Y... . named for Andrey Markov. An example of a non-Markovian process with a Markovian representation is a moving average time series Q.   A Markov chain is a sequence of random variables X1. let X be a non-Markovian process. Formally. such that each state of Y represents a time-interval of states of X. Then Yn is a Markov chain with state space Sm and has the classical Markov property.   e  . It is a random process characterized as memoryless (i. Mathematically. . The probability of the transition is independent of n.

and a recession the other 2. According to the figure. From this figure it is possible to calculate. r mp on ml k [ di ] rk c i The probability of going from state i to state j in n time steps is and the single-step transition is q i ii h gh h g j . for example.5% of the time. a bear market.5%. the long-term fraction of time during which the economy is in a recession. during a given week.y An additive Markov chain of order m where m is finite. or on average how long it will take to go from a recession to a bull market. A finite state machine can be used as a representation of a Markov chain. if the machine is in state y at time n.  Example A simple example is shown in the figure on the right.[5] also available on-line. is where [ lar f at on n d d] for n > m.[4] The appendix of Meyn 2007. a bull week is followed by another bull week 90% of the time. or a recession. contains an abridged Meyn & Tweedie. A thorough development and many examples can befound in the on-line monograph Meyn & Tweedie 2005. Assuming a sequence of independent and identically distributed input signals (for example. The states represent whether the economy is in a bull market. using a directed graph to picture the state transitions. a bear market 7. then the probability that it moves to state x at time n + 1 depends only on the current state. symbols from a binary alphabet chosen by coin tosses).

or [clarification needed] multiplexed cooperation exists within the higher frequency class. state j is accessible from state i if there exists an integer n  0 such that Allowing n to be zero means that every state is defined to be accessible from itself. . The initial distribution is Pr(X0 = x). downgraded. communicating classes need not be commutative. The marginal distribution Pr(Xn = x) is the distribution over states at time n. that for any k such that 0 < k < n. The evolution of the process through one time step is described by Note: The superscript (n) is an index and not an exponent. and no state in C communicates with any state not in C. where S is the state space of the Markov chain.For a time-homogeneous Markov chain: and The n-step transition probabilities satisfy the Chapman±Kolmogorov equation. A communicating class is closed if the probability of leaving the class is zero. That said. in that classes achiev greater ing periodic frequencies that encompass 100% of the phases of smaller periodic frequencies.  Reducibility A state j is said to be accessible from a state i (written i j) if a system started in state i has a non-zero probability of transitioning into state j at some point. Formally. may still be communicating classes provided a form of either diminished. It can be shown that communication in this sense is an equivalence relation and thus that communicating classes are the equivalence classes of this relation. A state i is said to communicate with state j (written i j) if both i j and j i. then j is not accessible from i. A set of states C is a communicating class if every pair of states in C communicates with each other. namely that if i is in C but j is not.

suppose it is possible to return to the state in {6.} time steps. For example. Then. then the state is said to be aperiodic: returns to state i can occur at irregular times.. . the state is said to be periodic with period k. Formally. a Markov chain is said to be irreducible if its state space is a single communicating class.A state i is said to be essential if for all j such that i inessential if it is not essential. Formally. 8.[clarification needed][citation needed] It can be also shown that every state of a bipartite graph has an even period. there is a non-zero probability that we will never return to i. If k = 1.[citation needed]  Recurrence A state i is said to be transient if. Note that even though a state has period k. the period of a state is defined as (where "gcd" is the greatest common divisor). 10. 12. even though 2 does not appear in this list.  Periodicity A state i has period k if any return to state i must occur in multiples of k time steps. k would be 2. given that we start in state i. let the random variable i be the first return time to state i (the "hitting time"): s The number is the probability that we return to state i for the first time after n steps. in other words. Otherwise (k > 1).  Mean recurrence time . if it is possible to get to any state from any state. Recurrent states have finite hitting time with probability 1.[6] j it is also true that j i. A state i is Finally. It can be shown that every state in a communicating class must have overlapping periods with all equivalent-or-larger occurring sample(s). it may not be possible to reach the state in k steps. state i is transient if State i is recurrent (or persistent) if it is not transient..

. is unique and is related to the expected return time: . this condition is fulfilled with N=1.  Steady-state analysis and limiting distributions If the Markov chain is a time-homogeneous Markov chain. The mean recurrence time at state i is the expected return time i: t State i is positive recurrent (or non-null persistent) if Mi is finite. A model with just one out-going transition per state cannot be ergodic. the state i is absorbing if and only if  Ergodicity A state i is said to be ergodic if it is aperiodic and positive recurrent.  Expected number of visits It can be shown that a state i is recurrent if and only if the expected number of visits to this state is infinite. then the chain is said to be ergodic. then the vector is called a stationary distribution (or invariant measure) if its entries j are non-negative and sum to 1 and if it satisfies An irreducible chain has a stationary distribution if and only if all of its states are positive recurrent.e. so that the process is described by a single. it need not have a finite expectation. A model has the ergodic property if there's a finite number N such that any state can be reached from any other state in exactly N steps. state i is null recurrent (or null persistent). i. If all states in an irreducible Markov chain are ergodic. Therefore.  Absorbing states A state i is called absorbing if it is impossible to leave this state. otherwise. In case of a fully-connected transition matrix where all transitions have a non-zero probability. time-independent matrix pij. In that case. It can be shown that a finite state irreducible Markov chain is ergodic if it has an aperiodic state.Even if the hitting time is finite with probability 1.

the chain converges to the stationary distribution regardless of where it begins. let fij be the probability that the chain ever visits state j if it starts at i. If a chain has more than one closed communicating class. although the limit does exist for every integer r.Further. if a statej is aperiodic. Note that there is no assumption on the starting distribution. Such is called the equilibrium distribution of the chain. its stationary distributions will not be unique (consider any closed communicating class in the chain. If a state i is periodic with period k > 1 then the limit does not exist.  Steady-state analysis and the time-inhomogeneous Markov chain A Markov chain need not necessarily be time-homogeneous to have an equilibrium distribution. where the probability outside the class is set to zero). Any of these will extend to a stationary distribution for the overall chain. then and for any other state i. if the chain is both irreducible and aperiodic. However. If there is a probability distribution over states such that . each one will have its own unique stationary distribution. then for any i and j.

P is a right stochastic matrix. the limit does not exist.  Finite state space If the state space is finite. As any continuous transformation in the unit simplex has a fixed point. that is. in this case Pk converges to a ran -one matrix in which each row is the stationary distribution . This is stated by the Perron± Frobenius theorem. j)th element of P equal to Since each row of P sums to one and all elements are non-negative. In other words. but is not guaranteed to be unique. Additionally. because each is efficient for a particular ind of mixing. Pk. Alternatively.for every state j and every time then is an equilibrium distribution of the Mar ov chain. a stationary distribution always exists. For some stochastic matrices P. as will be explained below. then there is a unique stationary distribution . However. whose entries are non-negative and sum to 1. the stationary distribution is a normalized (meaning that the sum of its entries is 1) left eigenvector of the transition matrix associated with the eigenvalue 1. in general. If. by whatever means. where 1 is the column vector with all entries equal to 1. the transition probability distribution can be represented by a matrix. then the stationary distribution of the Mar ov chain in question can be easily determined for any starting distribution. Such can occur in Mar ov chain Monte Carlo (MCMC) methods in situations where a number of different transition matrices are used. The stationary distribution that satisfies the equation is a (row) vector. with the (i. but each matrix respects a shared equilibrium distribution. as shown by this example: u . then the transition matrix P is the same after each step. called the transition matrix.  Time-homogeneous Markov chain with a finite state space If the Mar ov chain is time-homogeneous. can be viewed as a fixed point of the linear (hence continuous) transformation on the unit simplex associated to the matrix P. if the Mar ov chain is irreducible and aperiodic. so the k-step transition probability can be computed as the k-th power of the transition matrix. is found.

. Hence. the detailed balance equation can be written more compactly as Summing the original equation over i gives v vv  } z  ~ w z y x w w w . the process of finding this limit if it exists can be a lengthy task. Here is one method for doing so: first. so Q must be a stochastic matrix. Pr(Xn+1 = j | Xn = i) does not change with time n and it can be written more simply as pij. However. define the function f(A) to return the matrix A with its right-most column replaced with all 1's. Let P be an n×n matrix.Because there are a number of different special cases to consider. and define It is always true that Subtracting Q from both sides and factoring then yields where In is the identity matrix of size n.i on its main diagonal that is equal to 1 and the ith row or column is otherwise filled with 0's. then that row or column will remain unchanged in all of the subsequent powers Pk. It is sometimes sufficient to use the matrix equation above and the fact that Q is a stochastic matrix to solve for Q. and 0n.n is the zero matrix of size n×n. the ith row or column of Q will have the 1 and the 0's in the same positions as in P. such that for all times n and all states i and j. With a time-homogeneous Markov chain. If [f(P í In)]í1 exists then [citation n d d] One thing to notice is that if P has an element Pi. This condition is also known as the detailed balance condition (some books refer the local balance equation). In this case. Multiplying together stochastic matrices always yields another stochastic matrix. there are many techniques that can assist in finding this limit. }| { [ di ] r ibl rk c i A Markov chain is said to be reversible if there is a probability distribution over states.

yet restrictive enough to allow for a rich theory. however. for reversible Markov chains. which means that the next state is even independent of the current state (in addition to being independent of the past states). Often they are used as a mathematical model from some random physical process. if Pr(X0 = i) = i. the collection of Harris chains is a comfortable level of generality. Then we could collapse the sets into an auxiliary point . The main idea is to see if there is a point in the state space that the chain hits with probability one. Lastly. [ di ] Applic i Markov chains are applied in a number of ways to many different fields. where multiple transition matrices are used. then Pr(Xn = i) = i for all n and the detailed balance equation can be written as  The left. Generally.            r l              p c . If the Markov chain begins in the steady-state distribution. i e. Even with timeinhomogeneous Markov chains. they are used to model a more abstract process. and are the theoretical underpinning of an algorithm. [ di ] G Many results for Markov chains with finite state space can be generalized to chains with uncountable state space through Harris chains. it is not true for continuous state space. this necessarily implies that is a steady-state distribution of the Markov chain. In other cases. such that 1.and right-hand sides of this last equation are identical except for a reversing of the time indices n and n + 1. Reversible Markov chains are common in Markov chain Monte Carlo (MCMC) approaches because the detailed balance equation for a desired distribution necessarily implies that the Markov chain has been constructed so that is a steady-state distribution.  [ di ] B r    ulli c A Bernoulli scheme is a special case of a Markov chain where the transition probability matrix has identical rows. quantitative predictions can be made. which is broad enough to contain a large number of interesting examples. if each such transition matrix exhibits detailed balance with the desired distribution. and a recurrent Harris chain can be modified to contain . A Bernoulli scheme with only two possible states is known as a Bernoulli process. we can define sets A and B along with a positive number and a probability measure .. is always a steady-state distribution of Pr(Xn+1 = j | Xn = i) for every n. 2. if theparameters of the chain are known.so.

It is not aware of its past (i. where at each time step the reaction proceeds in some direction. a method of conjoining Markov chains to form a "Markov blanket".. the growth (and composition) of copolymers may be modeled using Markov chains. whether monomers tend to add in alternating fashion or in long runs of the same monomer)..  Chemistry Michaelis-Menten kinetics. Also. An algorithm based on a Markov chain was also used to focus the fragment based growth of [7] chemicals in silico towards a desired class of compounds such as drugs or natural products. o . It then transitions to the next state when a fragment is attached to it. The classical model of enzyme activity. Physics Markovian systems appear extensively in thermodynamics and statistical mechanics.g. Based on the reactivity ratios of the monomers that make up the growing polymer chain.'s paper entitled "Temporal Uncertainty Reasoning Networks for Evidence Fusion with Applications to Object Detection and Tracking" (ScienceDirect) gives a background and case study for applying MCSTs to a wider range of applicati ns.  Testing Several theorists have proposed the idea of the Markov chain statistical test (MCST). second-order Markov effects may also play a role in the growth of some polymer chains. arranging these chains in several recursive layers ("wafering") and producing more efficient test sets ²samples²as a replacement for exhaustive testing. whenever probabilities are used to represent unknown or unmodelled details of the system. far more complicated reaction networks can also be modeled with Markov chains. The enzyme (E) binds a substrate (S) and produces a product (P). it is not aware of what is already bonded to it). While Michaelis-Menten is fairly straightforward. and that no relevant history need be considered which is not already included in the state description. Chilukuri et al. Michaelis-Menten kinetics. the chain's composition may be calculated (e. Chemistry is often a place where Markov chains and continuous-time Markov processes are especially useful because these simple physical systems tend to satisfy the Markov property quite well. The transition probabilities are trained on databases of authentic classes of compounds. can be viewed as a Markov chain. As a molecule is grown. Due to steric effects. MCSTs also have uses in temporal state -based networks. if it can be assumed that the dynamics are time-invariant. Each reaction is a state transition in a Markov chain.e. a fragment is selected from the nascent molecule as the "current" state.

from designing the best strategy.  Scenario simulations In a business game or business simulation game. Mar ov chains also play an important role in reinforcement learning. and Social-process simulations. Data management simulations. Even without describing the full structure of the system perfectly. Crisis management simulations. They also allow effective state estimation and pattern recognition. such signal models can ma e possible very effective data compression through entropy encoding techniques such as arithmetic coding. and 2. This ma es them critical for optimizing the performance of telecommunications networ s. to understanding how multiple possible futures might be linked to decisions and actions that must be taken today. from predicting the future. for instance for coding region/gene prediction. 3. where messages must often compete for limited resources (such as bandwidth). which in a single step created the field of information theory. to analyzing how robust our preferred strategy would be under different assumptions about how the future might unfold. The concept of simulation gaming seems to offer the right combination and balance between the two[1]. the word game can imply time wasting. The world's mobile telephone systems depend on the Viterbi algorithm for error-correction. Claude Shannon's famous 1948 paper A mathematical theory of commu ication. a scenario is played out in a simulated environment and the learner or user is as ed to ma e individual or team based decisions on . On the other hand. Diagnostic simulations.[5] Q. Information sciences Mar ov chains are used throughout information processing. while hidden Mar ov models are extensively used in speech recognition and also in bioinformatics.   Queueing theory Mar ov chains are the basis for the analytical treatment of queues (queueing theory). not taking things too seriously and engaging in an exercise designed purely for fun. or about how the past actually produced the events that we perceive. 2.13:Simulation also refers to activities where an optimum for some problem is searched for. opens by introducing the concept of entropy through Mar ov modeling of the English language. while this is not usually the aim of an educational game. Simulation gaming is also the term that the educational gaming community has adopted Gredler[15] divides experiential simulations into the following four categories: 1. 1. Such idealized models can capture many of the statistical regularities of systems. Mar ov chains are also the basis for Hidden Mar ov Models. 4. speech recognition and bioinformatics. which are an important tool in such diverse fields as telephone networ s (for error correction).

Many numeric business simulations include elements of competition against other participants or against computer generated competitors. 1962).Whether the decisions or participants influence the results of other competitive participants or not. a balance sheet and a cash flow statement. In a noninteractive game decisions are submitted to the game administrator. These are similar to role-play simulations.  Numeric simulations A numeric simulation can mimic a whole company on a high level or it can be more detailed and mimic specific organizational units or processes. Interactive or Noninteractive In an interactive game participants respond to the questions at the computer. eg.how to act in the simulations. and then submit additional decisions. Played by Individuals or by Teams Deterministic or The stochastic alternative is probabilistic.g. such as when a year has passed. an income statement. In a numeric simulation the learner or user ma es decisions by pulling levers and dialers as well as through inputting numbers. In generic games only general business relationships are replicated. Feedbac is given throughout the simulation or at certain intervals. which is practically identical with the taxonomy from Greenlaw et al. Greenlaw et al. Throughout or at certain intervals feedbac is provided. Competitive or Non. . Industry specific or In an industry specific game the authors attempt to replicate closely the actual Generic industry. including chance elements. OR  Functional or Total enterprise Designed to give participants experience in ma ing decisions at a top executive level and in which decisions from one functional area interact with those made in other areas of a firm.. The decisions are processed and the outcomes are calculated and shown in reports and graphs. price and volume as well as number of employees can be decisions and the outcome can be viewed in e. Dimension Description of alternatives Designed to focus specifically on problems of decision-making as seen in one functional area. receive an immediate response.  Types of Business Simulation ames Business simulation games can be classified according to several properties. Often multiple choice alternatives are used and the scenario is played out following a branching tree based on which decisions the learner ma es. Here we introduce the taxonomy from Biggs [36].g. The first taxonomies were introduced already in the beginning of the 1960s (see e.

Kolb's influential wor in the field of experiential learning[37]. but without reflecting on this experience the learning potential may be lost. which require special attention at the stages of reflection and generalization[41].  . The last phase in the list above is usually called debriefing. but is irrelevant today) Two dimensions of complexity: (a) game decision input variable complexity. (b) the computer model complexity E.g. We all learn from experience. Group discussions: Each of the participants is given a possibility to present and compare their results from the game with the results of others. presented as a flexible suggestion and not as rigid requirements: 1. Debriefing is the most important part of the simulation/gaming experience[40]. When arguing for this. The activities carried out during a simulation game training session are[39]: y y y y Theoretical instruction: the teacher goes through certain relevant aspects of a theory and participants can intervene with questions and comments. as well as keeping the training going to maintain a positive atmosphere and to secure that the participants feel engaged. 2.Stochastic Mainframe or Microcomputer Degree of complexity The time period simulated (note: this di ension ay have been a valid consideration still in 1990. During the last decades also ideas from constructivism have influences the learning discussion within the simulation gaming field[38]. Simulation gaming needs to be seen as contrived experiences in the learning cycle. The teacher should continually look for new ways of enriching the discussions and to help the participants to find the connection between the game results and the problems in real world. Playing the game: participants get the opportunity to practice their knowledge and skills by changing different parameters of the game and reflecting on the possible consequences of these changes. Thiagarajan[42] lists six phases of debriefing. What happened? Makes it possible for the participants to compare and to contrast participant recollections and to draw some general conclusions during the next phase. they most often refer to David A. The participants are encouraged to present their results to others. Permanent contact with the participants is advisable. Introduction to the game: the participants are told how to operate the computer and how to play the game. day/week/quarter/year    The Simulation aming Process Business simulation game developers regard their artefacts to be learning environments. The quality of this group discussion plays a relevant role in the training as it will affect the participants transfer of knowledge and skills into the real world. How do you feel? Gives the participants an opportunity to get some of their strong feelings about the simulation game off their chest.

hat ne t? Participants use their insights to come up with strategies for the simulation 6. a facilitator provides an anonymous summary of the experts¶ forecasts from the previous round as well as the reasons they provided for their judgments. hat if ? Encourage the participants to apply their insights to new conte ts. game and for the workplace. 3. Furthermore. not the gaming outcome.14:Here the offer of the third buyer.[1] In the standard version. originally developed as a systematic. 5. such as the Policy Delphi. 4. more recent web-based experiments have used the Delphi method as a communication technique for interactive decision-making and e-democracy. It is believed that during this process the range of the answers will decrease and the group will converge towards the "correct" answer.[5] Delphi is based on the principle that forecasts (or decisions) from a structured group of [6] individuals are more accurate than those from unstructured groups. Gentry also expresses that process feedback is much more valuable than outcome feedback.[2] Other versions.[3] have been designed for normative and [4] explorative use.[7] The technique can also be adapted for use in face face meetings. How does this relate to the real world? Encourage a discussion of the relevance of the game to the participants real world workplace. In Europe. interactive forecasting method which relies on a panel of experts. This has been indicated -towith the term "collective intelligence". Delphi has        . achievement of consensus. Thus experts are . particularly in the area of social policy and public health. After each round. the experts answer questionnaires in two or more rounds. Finally. stability of results) and the mean or median scores of the final rounds determine the results. encouraged to revise their earlier answers in light of the replies of other members of their panel. it should be the decision process used that needs to be applauded or critiqued. Ask the participants to come up with general principles based on their e periences from the game and to offer evidence to support or to reject the principles.g. number of rounds. 1990) .payable right away. Q. and the instructor needs to put things into a broader perspective. Van Ments[43] notes that the aim of debriefing is to: deal with factual errors and to tie up loose ends (including scoring). As games are l ss-than-perfect representations of the e real world.000/. and deduce ge eral n lessons which can be extrapolated to the real world. draw out general conclusions about the session.where he agrees to buy equipment for RS. the participants should not [44] be allowed to conclude what was learned without receiving feedback (Gentry. the process is stopped after a predefined stop criterion (e.hat did you learn? Encourage the generation and testing of different hypotheses. Q. Because of a matter of TVM or time value of money.29. and is then called mini-Delphi or Estimate-Talk-Estimate (ETE). The participants need to articulate their perception of what was learned.15:The Delphi method ( / d lfa / DEL-fy) is a structured communication technique.

together with various modifications and reformulations. because it implies "something oracular. something smacking a little of the occult". Arnold ordered the creation of the report for the U. To combat these shortcomings. such as theoretical approach. This process was repeated several times until a consensus emerged. such as theImen-Delphi procedure. The authors of the method were not happy with this name. prediction market Hi The name "Delphi" derives from the Oracle of Delphi.[10] It has been used ever since. in areas where precise scientific laws have not been established yet. Experts were asked to give their opinion on the probability.S.[9] In 1944. quantitative models or trend extrapolation.been widely used for business forecasting and has certain advantages over another structured forecasting approach. quickly became apparent. and Nicholas Rescher. Different approaches were tried. The Delphi method is based on the assumption that group judgments are more valid than individual judgments. the Delphi method was developed byProject RAND during the 19501960s (1959) by Olaf Helmer. Norman Dalkey. and intensity of possible enemy attacks.  [ di ] K  c r c ri ic Th lphi Method communication structure The following key characteristics of the Delphi method help the participants to focus on the issues at hand and separate Delphi from other methodologies:  Structuring of information flow The initial contributions from the experts are collected in the form of answers to questionnaires and their comments to these answers. but the shortcomings of traditional forecasting methods. Other experts could anonymously give feedback. General Henry H. Th panel director controls the e            r    . frequency. The Delphi method was developed at the beginning of theCold War to forecast the impact of technology on warfare. Army Air Corps on the future technological capabilities that might be used by the military.

who are selected for a reason. It was also applied successfully and with high accuracy in business forecasting. automation.  Anonymity of the participants Usually all participants remain anonymous. war prevention and weapon systems. industrial robots. and technology in education. to gradually wor towards synthesis. health and education. it also frees participants (to some extent) from their personal biases. prepared in 1964 by Gordon and Helmer. usually that they hold nowledge on an opinion or view. the process continues through thesis and antithesis. At any moment they can revise their earlier statements. of the particular technology. broadband connections. and building consensus. and traditional unstructured forecast methods had errors of about 20%. This prevents the authority. While in regular group meetings participants tend to stic to previously stated opinions and often conform too much to group leader. This avoids the negative effects of face-to-face panel discussions and solves the usual problems of group dynamics. The facilitator sends out questionnaires. and facilitates the responses of their panel of experts. Responses are collected and analyzed. intelligent internet.  Use in forecasting First applications of the Delphi method were in the field of science and technology forecasting. in one case reported by Basu and Schroeder (1977). such as economic trends.  Role of the facilitator The person coordinating the Delphi method can be nown as a facilitator. personality. For example. Later the Delphi method was applied in other areas. in a single indicator. especially those related to public policy issues.interactions among the participants by processing the information and filtering out irrelevant content. Quantitative methods produced errors of 10±15%. If consensus is not reached. the Delphi method prevents it. The objective of the method was to combine expert opinions on li elihood and expected development time. then common and conflicting viewpoints are identified. space progress.  Regular feedback Participants comment on their own forecasts. allows free expression of opinions. and if the panel of experts accept. population control. even after the completion of the final report. minimizes the "bandwagon effect" or "halo effect". the responses of others and on the progress of the panel as a whole. One of the first such reports. the Delphi method predicted the sales of a new product during the first two years with inaccuracy of 3±4% compared with actual sales. encourages open critique. or reputation of some participants from dominating others in the process. covering such topics as scientific brea throughs. they follow instructions and present their views. Other forecasts of technology were dealing with vehicle-highway systems. Their identity is not revealed. Arguably. surveys etc. . assessed the direction of long-term trends in science and technology development. and facilitates admission of errors when revising earlier judgments.

governments have widely ac nowledged the value of collective intelligence from civil society. academic and private sector participants of the Delphi. today the Delphi method is a widely accepted forecasting tool and has been used successfully for thousands of studies in areas varying from technology forecasting to drug abuse. such as technology policies. There have been many cases when the method produced poor results. the use of the Delphi technique in public policy-ma ing introduces a number of methodological innovations. especially in a field of rapid change. the complexity of the issues posed in public policy-making leads to give more importance to the arguments supporting the evaluations of the panelists. so a high degree of error is to be expected. Another particular wea ness of the Delphi method is that future developments are not always predicted correctly by consensus of experts. goal items. [12]  Use in policy-ma ing From the 1970s. Secondly. sometimes unconventional thin ing of amateur outsiders may be superior to expert thin ing. [citation needed ] It must also be realized that in areas such as science and technology forecasting. typically. If panelists are misinformed about a topic. In this sense. which the analysts can use to outline different scenarios: the desired scenario (from desirability).[11] As a result. the degree of uncertainty is so great that exact and always correct predictions are impossible. some authors attribute this to poor application of the method and not to the wea nesses of the method itself. Firstly. the potential scenario (from feasibility) and the expected scenario (from probability). One of the initial problems of the method was its inability to ma e complex forecasts with multiple factors. Potential future outcomes were usually considered as if they had no effect on each other. Still the Delphi method can be used most successfully in forecasting single scalar indicators. The governments of Latin America and the Caribbean have successfully used the Delphi method as an open-ended public-private sector approach to identify the most urgent challenges for their regional ICT-for-development eLAC Action Plans.The Delphi method has also been used as a tool to implement multi-sta eholder approaches for participative policy-ma ing in developing countries. feasibility (technical and political) and probability. In particular: y y the need to examine several types of items (not only forecasting items but. the use of Delphi may only add confidence to their ignorance. the issue of ignorance is important. and sometimes they are given the possibility to suggest new items to be submitted to the panel. These often include desirability. several extensions to the Delphi method were developed to address this problem. so these are often invited to list arguments for and against each option item. Despite these shortcomings. and option items) leads to introducing different evaluation scales which are not used in the standard Delphi. issue items. the Delphi method can contribute to a general appreciation of participative policy-ma ing. that ta es into consideration the possibility that the occurrence of one event may change probabilities of other events covered in the survey.   . Still. Later on.  Acceptance Overall the trac record of the Delphi method is mixed. such as cross impact analysis.

the TechCast Project uses a panel of 100 experts worldwide to forecast brea throughs in all fields of science and technology. 3. Yet. 2. Some of the types in this method are. including in demand forecasting. Methods No demand forecasting method is 100% accurate.  Online Delphi forecasting systems A number of Delphi forecasts are conducted using web sites that allow the process to be conducted in Real-time Delphi. Further examples are several studies conducted by the Center for Futures Studies and Knowledge Management that use an online-based Delphi method. there are differences that may be decisive for their relative applicability for different problems. y y y y y y y y Unaided judgment Prediction market Delphi technique Game theory Judgmental bootstrapping Simulated interaction Intentions and expectations surveys Conjoint analysis . Combined forecasts improve accuracy and reduce the li elihood of large errors. prediction mar ets As can be seen from the Methodology Tree of Forecasting. They aggregate information automatically and instantly incorporate new information in the forecast. ­ Delphi seems to have these advantages over prediction mar ets: 1.[2][3]  Methods that rely on qualitative assessment Forecasting demand based on expert opinion. Potentially quicker forecasts if experts are readily available. Delphi has characteristics similar to prediction mar ets as both are structured approaches that aggregate diverse opinions from groups. Reference class forecasting was developed to reduce error and increase accuracy in forecasting. For instance. They themselves decide whether to participate if they think their private information is not yet incorporated in the forecast. Participants do not have to be selected and recruited manually by a facilitator. They can motivate people to participate over a long period of time and to reveal their true beliefs. Delphi vs.[8] Some advantages of prediction mar ets derive from the possibility to provide incentives for participation. 1.

In project management. It may be considered as a specialized case of automatic scheduling. For example. Methods that rely on quantitative data y y y y y y y y y Discrete Event Simulation Extrapolation Reference class forecasting Quantitative analogies Rule-based forecasting Neural networks Data mining Causal models Segmentation Q.[2] One class of resource allocation algorithms is the auction class. This is especially common in electronic devices dedicated to routing and communication. 1) parameterized by two positive shape . Resource leveling The main objective is to smooth resources requirements by shifting slac jobs beyond periods of pea requirements. In one paper on CPU time slice allocation[3] an auction algorithm is compared to proportional share scheduling.16:a. Resource allocation is used to assign the available resources in an economic way. (b)(I). In probability theory and statistics. They of course depend for their success on the speed and capabilities of electronic computers. others ma e use of unusual devices or procedures designed especially for the computer. resource allocation is the scheduling of activities and the resources required by those activities while ta ing into consideration both the resource availability and the project time Algorithms Resource allocation may be decided by using computer programs applied to a specific domain to automatically and dynamically distribute resources to applicants. It is part of resource management. as in a online auction business model (see also auction theory). whereby applicants bid for the best resource(s) according to their balance of "money". the beta distribution is a family of continuous probability distributions defined on the interval (0. Some of the methods essentially replicate what a human scheduler would do if he had enough time. channel allocation in wireless communication may be decided by a base transceiver station using an appropriate algorithm.

the beta distribution can be seen as the posterior probability of the parameter p of a binomial distribution after observing í 1 successes (with probability p of success) and í 1 failures (with probability 1 í p of failure). [2] Many major construction projects have incurred cost overruns. and the beta is conjugate to the binomial and Bernoulli distributions in exactly the same way as the Dirichlet distribution is conjugate to the multinomial distribution and categorical distribution. function as a concentration parameter. In effect. this has the effect of smoothing out the distribution of the parameters by ensuring that some positive probability mass is assigned to all parameters even when no actual observations corresponding to those parameters is observed. and . also nown as a cost increase or budget overrun. [3] The Channel Tunnel between the UK and France had a construction cost overrun of 80 percent. Overruns of 50 to one hundred percent were common. If and are greater than 1. and had estimated too narrow a scope. such as the probability of success in a binomial distribution or Bernoulli distribution. In fact.[1] For IT projects. i. The beta distribution is the special case of the Dirichlet distribution with only two parameters. Values of and less than 1 favor sparsity. the project was 275 percent (\$11 billion) over budget. even the cost estimate produced the year before construction began underestimated the project's actual costs by a factor of three. ) on the parameter p of a binomial distribution is equivalent to adding í 1 pseudo-observations of "success" and í 1 pseudo-observations of "failure" to the actual number of successes and failures observed.[improper synthesis? ] Cost underestimation was found in each of 20 nations and five continents covered by the study.[ . 71 percent of projects were over budget. see that article for more details. and a 140-percent financing cost overrun. and technology projects. distributions where the parameter p is close to either 0 or 1. and the Concorde supersonic aeroplane cost 12 times more than predicted. In Bayesian statistics. when operating together. an industry study by the Standish Group found that the average cost overrun was 43 percent. Cost overrun is common in infrastructure.. The domain of the beta distribution can be viewed as a probability. Another way to express this is that placing a prior distribution of Beta( .[1] The Sydney Opera House cost 15 times more than was originally projected. Cost overrun should be distinguished from cost escalation. building. exceeded time estimates.e. A cost overrun. The Suez Canal cost 20 times as much as the earliest estimates. is an unexpected cost incurred in excess of a budgeted amount due to an under-estimation of the actual cost during budgeting.parameters.[1] When Boston's "Big Dig" tunnel construction project was completed. A comprehensive study of cost overrun published in the Journal of the American Planning Association in 2002 found that 9 out of ten construction projects had underestimated costs. and cost underestimation had not decreased in the 70 years for which data were available. and in fact the beta distribution is often used to describe the distribution of an un nown probability value ² typically. (II). and total waste was estimated at \$55 billion per year in the US alone. the beta distribution is the conjugate prior of the binomial distribution and Bernoulli distribution. which is used to express an anticipated growth in a budgeted cost due to factors such as inflation. as the prior distribution over a probability parameter. typically denoted by and .

Eight game-theorists have won the Nobel Memorial Prize in Economic Sciences.Q. to include human as well as non-human players (computers. Representation of games See also: List of games in game theory The games studied in game theory are well-defined mathematical objects. and John Maynard Smith was awarded the Crafoord Prize for his application of game theory to biology. and statistics) and biology (particularly evolutionary biology and ecology). which allowed mathematical statisticians and economists to treat decision-ma ing under uncertainty. Von Neumann's original proof used Brouwer's fixed-point theorem on continuous mappings into compact convex sets. it has been expanded to treat a wide class of interactions.In mathematics. "game theory is a sort of umbrella or 'unified field' theory for the rational side of social science. and his conjecture about the non-existence of a mixed-strategy equilibria in two-person zerosum games was wrong. each player of the game has adopted a strategy that cannot improve his outcome. and debates continue over the appropriateness of particular equilibrium concepts. which considered cooperative games of several players. which are classified according to several criteria. 1991). Borel's results were limited. The modern epoch of game theory began with the statement of the theorem on the existence of mixed-strategy equilibria in two-person zero-sum games and its proof by John von Neumann. The second edition of this boo provided an axiomatic theory of expected utility. in which an individual's success in ma ing choices depends on the choices of others (Myerson. This theory was developed extensively in the 1950s by many scholars. and the usefulness of mathematical models in the social sciences. given the others' strategy. although similar developments go bac at least as far as the 1930s. computer science. Most cooperative games are presented in the . Many equilibrium concepts have been developed (most famously the Nash equilibrium) to describe aspects of strategic equilibria. although they often overlap or coincide. Traditional applications of game theory define and study equilibria in these games. These equilibrium concepts are motivated differently depending on the area of application. While initially developed to analyze competitions in which one individual does better at another's expense (zero sum games). and a specification of payoffs for each combination of strategies. which became a standard method in game theory and mathematical economics. with Os ar Morgenstern. management. In an equilibrium. A game consists of a set of players. Game theory has been widely recognized as an important tool in many fields. It is used in the social sciences (most notably in economics. which led to his 1938 boo Applications aux Jeux de Hasard. Mathematical game theory had beginnings with some publications by Émile Borel. This methodology has received criticism. However. game theory models strategic situations. operations research. or games. animals.18. Today. the appropriateness of equilibria altogether. His paper was followed by his 1944 boo Theory of Games and Economic Behavior. a set of moves (or strategies) available to those players. and social psychology) as well as in other formal sciences (logic. political science." (Aumann 1987). plants). where 'social' is interpreted broadly. Game theory was later explicitly applied to biology in the 1970s.

Player 2 sees Player 1's move and then chooses A or R. Player 1 moves first and chooses either F or U. The player is specified by a number listed by the vertex.characteristic function form. 0 3. The extensive form can also capture simultaneous-move games and games with imperfect information. (Fudenberg & Tirole 1991.. (See example in the imperfect information section. To represent it. 4 .)  Normal form Player 2 chooses Left Player 2 chooses Right Player 1 chooses p ® 4. the players do not know at which point they are). 67) In the game pictured to the left. The payoffs are specified at the bottom of the tree. 3 1.e. then Player 1 gets 8 and Player 2 gets 2. The lines out of the vertex represent a possible action for that player. either a dotted line connects different vertices to represent them as being part of the same information set (i. p. there are two players. Games here are played on trees (as pictured to the left). The extensive form can be viewed as a multi-player generalization of a decision tree. 1 Player 1 chooses Down 0. while the extensive and the normal forms are used to define noncooperative games. or a closed line is drawn around them. Here each vertex (or node) represents a point of choice for a player.  Extensive form Main article: Extensive form game An extensive form game The extensive form can be used to formalize games with a time sequencing of moves. Suppose that Player 1 chooses U and then Player 2 chooses A.

The payoffs are provided in the interior. but not all games in characteristic functionform can be derived from normal form games.  Partition function form The characteristic function form ignores the possible externalities of coalition formation. Every extensive-form game has an equivalent normal-form game. the second is the payoff for the column player (Player 2 in our example). it is presumed that each player acts simultaneously or. and payoffs (see the example to the right). a characteristic function form game (also known as a TU -game) is given as a pair (N. and Player 2 gets 3. one chooses the row and the other chooses the column. assumed that when a coalition C forms. The origin of this form is to be found in the seminal book of von Neumann and Morgenstern who. Each player has two strategies. it plays against the complementary coalition ( ) as if they were playing a 2-player game. Instead. where N denotes a set of players and is a characteristic function. In the partition function form the payoff of a coalition depends not only on its members. without knowing the actions of the other. p. at least. The standard assumption is that the empty coalition obtains a payoff of 0. 35)  Characteristic function form Main article: Cooperative game In cooperative games with transferable utility no individual payoffs are given. In the accompanying example there are two players. If players have some information a bout the choices of other players. The characteristic function form has been generalised to games without the assumption of transferable utility. More generally it can be represented by any function that associates a payof for each player with every possible f combination of actions. the characteristic function determines the payoff of each coalition. The first number is the payoff received by the row player (Player 1 in our example). strategies. Formally. Now there are different models to derive coalitional values from normal form games. The equilibrium payoff of C is characteristic. however the transformation to normal form may result in an exponential blowup in the size of the representation. but also on the way the rest of the players are partitioned (Thrall & Lucas 1963).v). when studying coalitional normal form games. the game is usually presented in extensive form. When a game is presented in normal form. (Leyton-Brown & Shoham 2008. ¯ Main article: Normal-form game Normal form or payoff matrix of a 2-player 2strategy game . Suppose that Player 1 playsUp and that Player 2 plays Left.The normal (or strategic form) game is usually represented by a matrix which shows the players. Then Player 1 gets a payoff of 4. making it computationally impractical. which are specified by the number of rows and the number of columns.

For instance. in the centipede game.[7] ² [ di ] G ± r l d ppli d u ´ ´ ° ° ³ ² ³ ³ ° ° ° . This particular view of game theory has come under recent criticism. The use of game theory in the social sciences has expanded. The developments in economics were later applied to biology largely byJohn Maynard Smith in his book Evol tion and the heory of ames. However. new models of deliberation.[6] · ¶ µ  Description and modeling A three stage Centipede Game The first known use is to describe and model how human populations behave. Game theorists may assume players always act in a way to directly maximize their wins (the Homo economicus model). This work predates the name "game theory". and the dictator game. sociological. and psychological behaviors as well. irrationality. additional criticism of this use of game theory has been levied because some experiments have demonstrated that individuals do not play equilibrium strategies.As a method of applied mathematics. Game-theoretic arguments of this type can be found as far back as Plato. human behavior often deviates from this model. It was initially developed in economics to understand a large collection of economic behaviors. markets. but it shares many important features with this field. game theory has been used to study a wide variety of human and animal behaviors. There is an ongoing debate regarding the importance of these experiments. Game-theoretic analysis was initially used to study animal behavior by Ronald Fisher in the 1930s (although even Charles Darwin makes a few informal game-theoretic statements). or even different motives (like that of altruism). guess 2/3 of the average game. including behaviors of firms. and game theory has been applied to political. but in practice. Thus while their assumptions do not always hold. scholars have applied game theory to help in the und erstanding of good or proper behavior. and consumers. Game theorists respond by comparing their assumptions to those used in physics. it is criticized because the assumptions made by game theorists are often violated. In addition to being used to predict and explain behavior. Explanations of this phenomenon are many. Some scholars believe that by finding the equilibria of games they can predict how actual human populations will behave when confronted with situations analogous to the game being studied. First. game theory has also been used to attempt to develop theories of ethical or normative behavior. people regularly do not play Nash equilibria. they can treat game theory as a reasonable scientific ideal akin to the models used by physicists. In economics andphilosophy.

These models presume either no rationality or bounded rationality on the part of players. playing a strategy that is part of a Nash equilibrium seems appropriate. the question of how populations reach those points remains open. However. -5 a Second. but as a suggestion for how people ought to behave. For an example. the Prisoner's dilemma presents another potential counterexample. 0 -5. evolutionary game theory does not necessarily presume natural selection in the biological sense. -1 actions of the other players. First. each player pursuing his own self-interest leads both players to be worse off than had they not pursued their own self-interests. However. this use for game theory has also come under criticism. Since a Nash equilibrium of a game constitutes one's best response to the Cooperate -1. but rather provide an explanation for why populations that play Nash equilibria remain in that state. some scholars see game theory not as a Cooperate predictive tool for the behavior of human beings. in Defect 0.Alternatively. fictitious play dynamics).  Prescriptive or normative analysis On the other hand. Evolutionary game theory includes both biological as well as cultural evolution and also models of individual learning (for example. Despite the name. -10 some cases it is appropriate to play a non-equilibrium strategy if one expects others to play non-equilibrium strategies as well. In the Prisoner's Dilemma. see Guess 2/3 of the The Prisoner's Dile average. Some game theorists have turned to evolutionary game theory in order to resolve these worries. some authors claim that Nash equilibria do not provide predictions for human populations. ¸¸ . Defect -10.

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