Linear Programming - An Effective Methodology to Solve Economic Problems

Nikolai Nikolov and Mariya Peneva
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Nikolai Nikolov: University of National and World Economy, Sofia, Bulgaria

Nauchni trudove, 2005, issue 1, 103-134

Abstract: In the 70-ies of the previous century most researchers believed that linear programming (LP) was one of the best techniques for solving a multitude of complex economic problems. Since early 80-ies, however, its influence has been on the wane. Publications related to the application of LP in economy have been decreasing in number while the number of its critics has been on the increase. The latter argue that the LP has no advantages compared to traditional calculation and construction methods (CCM) because certain inherent flaws affect its competitiveness. Therefore it cannot be of great importance for the economic theory and practice as a methodological tool targeted to tackle complex problems. The present paper attempts to review the arguments and examine how far this critique can be justified. Can it be claimed that the weaknesses of LP make it uncompetitive compared to other modifications of CCM? Based on a great number of experiments a comparative evaluation of the two methods is made using the following factors: a) effectiveness of the solutions proposed;b) time required to solve the problems; c) deviation of the solutions found with regard to preliminary requirements. The strengths and weaknesses of both methods have been traced with regard to two types of economic problems: 1) determinants – the parameters affecting their solution are accurate quantities. 2) stochastic problems – the parameters affecting their solution may be probability-related quantities i.e. they may be subject to probability variations within a certain range. The findings of LP’s strengths as a methodology to be used to address complex economic problems with probability parameters are of especial significance for the economic theory and practice.

Date: 2005
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