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Cost of prediction error in the economic order quantity formula
Author(s) -
Lowenthal Franklin
Publication year - 1982
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090030208
Subject(s) - approximation error , function (biology) , mathematics , order (exchange) , range (aeronautics) , relative value , value (mathematics) , mean squared prediction error , statistics , forecast error , relative price , econometrics , economics , microeconomics , materials science , finance , evolutionary biology , composite material , biology
The relative cost of prediction error in the economic order quantity model that results from the incorrect prediction of parameter values for annual demand, purchase order cost and carrying cost is described as a function solely of the relative error in those parameter values, and is shown to be independent of the absolute magnitude of these parameters. This function is shown to have, over a certain range, an important contraction property so that the relative cost of prediction error will be (significantly) less than the relative error in the parameter value.