Modelling Of Enterprise

Economics After Thermodynamic

Principles

Draft Working Paper

V.I.G.Menon
Economics Vs Thermodynamics
 Economics as we perceive here is all
about Wealth and that is Orderliness,and
that has to do with -ve entropy and
enthalpy,while thermodynamics focusses
on orderlessness (+ve entropy) and
enthalpy
Economics Vs Thermodynamics
 Thermodynamics is Concerned about
accounting Energy and Configuration
Changes Of Systems while Economics
is concerned about accounting Value
or Utility Of these Changes in an
economic activity
 Definition Of Economic Activity

(Potential Risk
High
1=HighValue,High Free
Value,High
W Economic Activity
Orderliness Of Configurations of

Energy State = 2,
Pot Free Energy O Is All About
1= High, Value,Low (Manmade Wealth)
State (wealth) R Converting
Free Energy State T Low Value Work
Men,Materials and Energy

(Natural Wealth) Or Products/Services

H
To High Value
Products/Services
O
R Demolition or Terrorist
Activity is the reverse
Low Value,High Free V of it.demolition/failure
1= Low Energy Zone is easy because of high
2= LowValue,Low
Value,Low (Hazardous Waste)
L
Free
Free Energy
EnergyState U
Potential energy/
(Even Trash)
State (Trash) Free energy and hence
E
high Risk

(Potential) Free Energy

 Another -Definition Of Economic
Activity

(Potential Risk
High
1=HighFree
Value,High
Negative Economic
Energy,,Low Entropy
Pot Free Energy Entropy Activity
1= Low Entropy,Low State 2,(Man made
= (wealth)
State OR Is all about
Wealth)
(Opposite

Free Energy State More Highly reducing the

(Natural Wealth)
Organized entropy in a
Nature Of the system and hence
Configuration increasing (and
(Increases accounting )
Entropy Increase

upwards) negative entropy

or orderliness and
Low Value,High Free hence the VALUE
Direction)

1= Low Energy,High Entropy

2= LowValue,Low
Value,Low Zone (Hazardous
of a Product Or
Free
Free Energy
Energy Service
State,High Entropy Waste)
State (Trash)
Zone (Even Trash)

(Potential) Free Energy

 Another -Definition Of Economic
Activity

High Value
1=High =2
Value,High
Pot Free Energy
State (wealth)
,(Man made Wealth)
Value/worth

1= Low
2= LowValue Raw
Value,Low
Material))
Free Energy
State (Trash)

Demand
Internal Worth and Value
 Internal Worth: The Intrinsic Physical,
Intellectual,Social or Spiritual Utility of a
Configuration of Material Or Energy
Pattern
 Value: The quantified worth
First Law
 All Value /Configuration States on an Economic Entity are
reversible but costs are not (with respect to orderliness,though
not with respect to energy).
 Thus ,in principle,a building can be raced down to bricks and
other constituents (including cement too),a SW code can be
obliterated to its base level.Even a learning can be corrected or be
deliberately unused !

No Conservation of energy is assumed here.Eg,to delete a file

from the computer memory it may take a second and a
microwatt power,but to prepare that it might have taken
enormous man hours .The newly formatted disk is as new as
when it was (it has to be) in the starting !In all these cases it is
the order factor (ie,entropy) and not energy,that is involved.
Stroke 2 : Convert the
 Inputs to “Outputs”(Q const)

B
Stroke

Stroke
Enterprise Engine

1 :Receive Inputs (P const)

3: Despatch Outputs (P const) D

Stroke 4 : Return to Receive

Inputs (Q Const)
 Stroke 2 : Convert the
 Inputs to “Outputs”(Q const)
1

Stroke

Stroke

Stroke 4 : Return to Receive

1 :Receive Inputs (P1 const)

Inputs (Q Const)
3: Despatch Outputs (P2 const)

2
 Economic Cycle


P2

P1

Q1 Q2

Note : The Goods Moving Out May Be Processed or already

processed/repacked as in Trading
Enterprise Engine:The 4 Cycles
 Stroke 1:Receive Inputs (P const)
 Stroke 2: Convert the Inputs to
“Outputs”(Q const)
 Stroke 3 :Transport the “Outputs”(P const)

 Stroke 4 :Return to Receive Inputs (Q

Const)
Governing Equation
 P1Q1 = KW1
 P2Q2 = KW2

The Economic Value Addition

= P1Q1 - P2Q2 = KW2 - KW1 =K(∆W)
So, ∆V= ∆PQ = P∆Q + Q∆P=K(∆W) EXPLAIN !
Note that Q∆P applies to Conversion and P∆Q applies
to trading
∆V is the value addition
Cost Intensity
Cost Intensity K is the increase in Cost C per unit increase of wage level w-this is
dependent on labour productivity
K = (dC/dw)
If the Cost Intensity K is measured for trade only

Then d CC is zero,since no conversion is there in trading,so,

Kt = (dC/dw)t. Also,
Kc = (dC/dw)c, where Kc is the Cost Intensity for Conversion without trading.
We also get,
K = Kt + Kc
Conversion Vs Trading
 From ∆V= ∆PQ = P∆Q + Q∆P =K(∆W)

We get
 ∆V/∆W = P(∆Q/∆W) + Q(∆P /∆W )=K

For trading ∆P =0,so,

Kt =(∂V/∂W)t = P(∂ Q /∂W) ,for trading,where Kt
is the cost intensity for trading
Conversion Vs Trading

 For Conversion we get similarly,

Cost Of Value Created
C=C t +C C ,where C = ∆V , C t = P∆Q is the cost
of Trading and C C = Q∆P , is the cost of
Conversion/Configuration Change.So,
 Kc =(∂V/∂W)c = Kt+ P(∂ Q /∂W)c =
Kc =∂(C t +C C )/ ∂W, for Conversion ,where Kc
is the cost intensity of Conversion.
Relation Between Kc and Kt
 PQ = KW (1)
 Q(P+∆P ) = K (W+1) (2)
 Subtracting (1) from (2) ,we get,
 Q∆P = K,
 that is,the cost increment for a unit increment in
revenue W for conversion is K
 So, Kc – K = K,
t
 What the First Law Means

Cost Of Value Created

C = CT + CC ,where C ∆V = ,CT = P∆Q and CC = Q∆P
Where CT is the cost of Trading and CC is the cost of
Conversion/Configuration Change
An “Equation” For Creating a Product
(Or Services)
Raw Material Products

Labour+Capital = Work

Unicode/Asci Well formed Soft

ware
Labour+Capital = Work

Activities Ordered Sequence of

Service Processes
Labour+Capital = Work
 An “Equation” For Creating a Product
(Or Services)

Consider any product or services made from a No of Component A and

b no of Component B to give c unit of Product C.Assume [A] is the Unit
(as % of single unit of A in C and similarly for B .Then the equillibrium constant
For this activity is given as

K = [C]c/([A]a[B]b

As if byproducts such as A,B ,AC,BC,are formed,they should also be represented

with the appropriate superscripts
Example
 20Kgs of SS sheet 301 and 3Kgs (1.5
Metres) of SS L angle are required to
produce one SS box,then the material
equillibrium constant is
Illustration for K,the
Equillibrium Constant

K = [C]1/([A]4[B]3
Importance Of Equillibrium
Constant
 Itis a constant as long as the Processes
are not improved.
 Gives an idea about the efficiency of the
processes
Price
 Macroscopic: How “worthy ” or “unworthy
” something is
• Microscopic: related to the orderliness of the
components of a system/subsystem
Ideal Market Law
 PQ =KW Customer Equation
 Where P is Price and Q is Quantity Demanded
 PQ = ∑piqi, where pi is the price and qi is the
(demanded)quantity of the ith commodity bought by
the customer whose wage is W. K is a Constant
varying from individual to individual,for a given wage .
 This simply states that individuals adjust their spending on
goods according to their incomes.
Ideal Market Law
 KW = PQ Supplier Equation
 Where P is Price and Q is Quantity Supplied
 PQ = ∑piqi, where pi is the price and qi is the
(supplied)quantity of the ith commodity by the
supplier whose wage/total net income is W. K is a
Constant varying from supplier to supplier,for a given set of
returns .
 This simply states that suppliers adjust their supply of goods
according to their planned incomes.
Visualising Ideal Market Law
Comparison with Ideal Gas Law
 Case I :Individual Consumer Context

A B

Just as Volume increases on reducing the Pressure, the share of a product

Or its demand increases when Price is reduced for a Given wage space
Represented by green and yelow zone together.Also extending the total volume
of the chamber (green + yellow) also increases Share of a given product
In the buyer’s wage space.
 Visualising Ideal Market Law
Comparison with Ideal Gas Law
 Case II : Product Market Context

A B

Just as Volume increases on reducing the Pressure, the Market Share of a product
Or its demand increases when Price is reduced for a Given average wage level
(represented by green and yelow zone together).Also extending the total volume
of the chamber (green + yellow) also increases Market Share of a given product
in the buyers’ increased wage space.
 Demand And Price
Since PQ = KW ,when W is a
 PQ = Constant as
Constant,
K is a constant.
This means ,the quantity Q demanded
is inversely proportional to the Price P.
Explaining the Classical approach Old Price Level
Old Price Level 1
New Price Level
New Market Share

New Price Level

2
Old Market Share

Old Marketshare (Green Area)

Increased Marketshare (additional Green Area

 Supply & Price
PbQb =K bWb for the buyer
PsQs =K sWs
PbQb =K bWb = PsQs =K sWs
K bWb = PbQb = PsQs =K sWs
Equillibrium Constant : (K b/K s) = ( Ws/ Wb)
( K bWb/K sWs ) = ( PbQb/ PsQs )
1 = ( PbQb/ PsQs ),ie,
( Ps/ Pb ) = ( Qb/Qs ) ie.,
( Qs ) = Pb* ( Qb/Ps ) ie, if Pb ≠ Ps ie, till equilibrium when Pb = Ps
Which shows that,till equillibrium is reached Quantity Supplied
Ie, Qs is proportional to the purchase price Pb..
 Supply and Price
As PQ = KW, and since all traders want W to
be increased ,
whenever the price increases, supplies also
increase

That is ,PdQ + QdP =KdW,that is,P(dQ/dP)

+Q = K(dW/dP)

dQ/dP +Q/P =( K/P)(dW/dP) =

(Q/W)*(dW/dP)

If dW/dP is const, dQ/dP

+Q/P =
(Q/W)*(A) =KA/P ,as Q/W =K/P

dQ/dP = 1/P(KA-Q)

KA-Q =P
Kinetic Theory of products
 The number/quantities of product is large, and
the average separation between products is
large
 The products obey Newton’s Laws of Motion
 The products undergo completely inelastic
collisions with the walls (buyers)
• No other interactions
 All the products are identical
 Note: this allows us to interpret the ideal gas
law in terms of microscopic objects!
Kinetic Theory of Market
 Demand is proportional to the number of
products per unit Market Area/Volume and
their average wage levels
 Price is a direct measure of the average Value
“ of the Products.
• For a uniproduct market , the internal worth is:

3
U = N B kT
2
Specific Value
 The specific value of a product is the amount
of work it takes to cause a unit increase (or
decrease) in its Price

 Q = m C ∆P

• c = specific value , different for every product

m = Quantity, Q= Total Value,P =Price
Latent Value

 Latent Value is defined as the amount of

(physical/intellectual/social) work it takes to
induce a utility change in a substance.
 Q=mL

• L = latent value, varies with utility and substance.

Latent Value and Specific Value