RE: Cause and Effect Reversed?

["Shaw, David" <dshaw@xxxxxxxxxxx>]

It's a maximization algorithm that requires solving for two variables at
once, consequently it looks circular.  The underlying assumption is simple -
saleable quantity is a function of price, cost is a function of quantity,
profit is total revenue (price times quantity) less total cost, therefor
there is some finite price that will maximize profit.  Obviously this is a
simplification, since the effect of time is not (and cannot be) stated
explicitly.  The passage of time allows all sorts of changes in conditions
(competitor reactions, consumer preference changes, etc.) which alter the
function relationships, which are of course difficult to define in advance
anyway.  The whole thing is accepted business theory, derived from accepted
economic theory, and large masses of data indicate that it does describe
price-setting behavior in a free market, your objections notwithstanding.

-----Original Message-----
From: Leif Svalgaard [mailto:leif@leif.org]

> >I think we are converging here. My real gripe was with Pete's statement
> >that the pricing formula determines the size of your production run, I
think
> >this is backwards at least when applied to the AS/400. I don't think
> >the argument can be made that:  "I'm not going to sell you one, because
> >doing so does not maximize my profit".
>
> That's not my point at all. If you have the correct price function, you
> will run out of customers at precisely the same time you run out of
> product. The price point determines the number of units that you will sell
> because it determines how many customers will want it, and you will have
> employed the algorithm to determine what that price point should be in
> order to maximize your profit. If you run out of product while there is
> still demand, or you end up with excess inventory, then you do not have
the
> correct price/sales-volume correlation.

Pete, don't you see that your argument is circular?
You define the correct correlation as the one that makes
the formula come out right.

Probably you won't see it so what's the use of
belaboring the point?
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