# 3. Diagram the Problem

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Overview

The first stage in building the model is drawing an influence diagram - which we will learn how to do in this lesson.

Lesson Notes

Influence diagrams

- Before we jump into building the model, we need to first structure the model
- Influence diagrams are a graphical way of structuring the model
- They are allow you to experiment with different structures without getting mired in detail

Transcript

Let's start by adding Total Cost as an outcome. I know that total cost is equal to total variable cost plus fixed cost. Fixed costs like rent, light, and heating cannot be changed in the near term and so I've included as parameters. Variable cost, on the other hand, is a function of unit cost and the quantity sold, so it's actually connected to the total revenue model. To finish up our Influence diagram I'll create a profit output and link both total revenue and total cost to this outcomes. Total revenue and total cost are now intermediate variables. So in the final version of the influence diagram I've changed their shape to take account of this fact. Armed with this influence diagram, we can now quickly create an excel profit model which would have been more difficult if we had skipped this step.

Even for a simple profit model such as this one, you can see how the influence diagram can serve to quickly structure your thinking. In the next lesson, we'll see how influence diagrams are even more necessary for complex problems such as Zippy Airways.

Contents

2 mins

3 mins

3 mins

2 mins

3 mins

4 mins

4 mins

2 mins

5 mins

5 mins

4 mins

3 mins

5 mins

4 mins

4 mins

6 mins

3 mins

#### 18. Limitations of the Model

2 mins

My Notes

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