Il Year Commerce PAPER VI Business Mathematics and Statistics Part A: Business Mathematics Part B : Business Statistics Unit: 1-t&1-1V SCHOOL OF OPEN LEARNING (Campus of Open Learning) University of Delhi Department of Commerce Prepared by : Dr. K.L. DahiyaGraduate Course Paper VI : Business Mathematics and Statistics CONTENTS: Part A: Business Mathematics , UNIT-I: Matrices and Determinants Lesson : Matrices and Determinants UNIT-II: Calculus Lesson 1 : Calculus Lesson 2 : Differentiation Lesson 3 : Indefinite Integration UNIT-III: Basic Mathematics of Finance Lesson 4 : Simple and Compound Interest Part B: Business Statistics UNIT-I: Descriptive Statistics for Unviariate Data Lesson 1 : Construction fo Frequency Distribution and Graphical Presentation Lesson 2 : Measures of Central Tendency Lesson 3 : Measures of Dispersion UNIT-II : Correlation and Regression Analysis Lesson 1 : Correlation Lesson 2 : Repression Analysis UNIT-III: Index Numbers Lesson : Index Numbers UNIT-IV: Time Series Analysis Lesson : Analysis of Time Series Editor: Dr. K.L. Dahiya UNIVERSITY OF DELHI 5, Cavalry Lane, Delhi - 110007Academic Session 2013-14 ( 28000 copies) © School of Open Learning Published by : Executive Director, School of Open Learning, 5, Cavalry Lane, Delhi-110 007 Printed at : Nutan Printers, F-89/12, Okhla Industrial Area, Phase-1, New Dethi-110020.UNIT-1 _ MATRICES AND DETERMINANTS Matrix algebra is an important tool of decision making in the problems of business and economics under the assumption of linearity. Matrix is a set of elements arranged in the form of a rectangular array, such as fan ay ay A Each matrix is denoted by a single capital letter and by brackets like [ ] or ( ). Each number of the ‘matrix is called an element. Elements written horizontally form a row and vertically written elements form @ column. Each element has two subscripts, first one indicates its row and the second one indicates the column of the matrix. In the above example elements a,, means element of the first row and first column; similarly a,, indicates the element of second row and the third column. Rows are always read first and columns afterwards, The number of rows and the number of columns specify the dimension of a matrix, The above matrix is of 3 rows and 3 columns. Therefore, its dimension is 3x3 (read 3 by 3). The dimension of a matrix is written as a subscript to the matrix, such as 4 1 9 m2 ag Ane} mx Total number of elements in a matrix are equal to the product of its rows and columns. For example, matrix A is of 33 order, therefore, the total number of elements in the above matrix will be 9. Similarly total number of elements in matrix C will be mn, ‘The following are some important facts about matrices : 4) Ifa matrix has only one row it is called a row matrix or row vector. xX=B27) b)_ Ifa matrix has only one column itis called a column matrix or column vector. 5 Y=|1 BI) Two matrices are equal, if and only if, there corresponding elements are equal and their dimensions are the same. For example, Alt 82 a) An} 2x2 A=B if ayaby dy = by, d)_Ifall the elements of a matrix are zero it is called a Null matrix (or Zero matrix). For example, 000 ofed 0 0 0} 2x3 ‘Types of Matrices 1) Square Matrix If the number of rows of a matrix are equal to the number of its columns i.¢., m =n, it is called a square matrix. For example; Tat [3 B-|5 7 6 4 2] 2x2 40.2) 3%3 Matrix A is a square matrix as there are only 2 rows and 2 columns. Itis called a square matrix of 2x2. Similarly B is @ square matrix of 33. 2) Diagonal Matrix ‘A square matrix is called a diagonal matrix when all its elements except the principal diagonal elements are zero. For example : a, 0 0 A=|0 ap 0 0-0 ay) 3x3 A isa diagonal matrix. 3) Identify Matrix or Unit Matrix ‘A square matrix whose principal diagonal are 1 and all elements above and below the principal diagonal are zero is known as an Identify matrix. For example: 100 =|0 1.0 {0.0 1) 3x3 It is an Identity matrix of 3%3. 4) Scalar Matrix Ifthe diagonal elements of a matrix are equal itis called a Scalar matrtix. For example: yey aay o 0 ooxo0 003 4 loo ox Matrix A and X are Scalar matAlgebra of Matrices ())_ Addition of Matrices : ‘Two matrices A, and B,., =b, can be added if their dimensions are same. If the addition matrix is called matrix C, then bean + Ban Dimensions of matrix € will be similar to the dimensions of matrices A and B. Matrix C can be obtained by adding corresponding elements of matrix A with the elements of matrix B. For example: 4 ie A2|71 3 6] [S+1 443 0+2] ThenC=|7+2 1+4 246] los eet 363 Cy =ay +d, If the dimensions of two matrices are different, they cannot be added. For example ie 2 asl 7 6] 2x2 Aga and By. cannot be added. (a) Matrix addition is commutative, ie., A+B=B+A [provided their dimensions are same] (b) IFA, B, C are three matrices of the same dimensions, then A+(B+C)=(A+B)+C It indicates that matrix addition is associative. (©) If Null matrix O,,,. 18 added with a matrix. A,,., we getonly matrix A,..,. For example fo o Lo OJax2 Ona + Ara = Subtraction of Matrices Subtraction of two matrices is possible if their dimensions are same. For example (a,)-(b,)=(¢,) whered, =a, - 70 1) 2 7, s)2x3. D=A-B 7-2 0-8 ale yg ty 2-1 7-3 5-6) [1.4 -1Jax3 Dimensions of matrix D will be same as that of A and B. (3) Multiplication of a matrix by a Scalar When a real number is multiplied with all the elements of a matrix, it is called a scalar ‘multiplication and the number is known as a scalar (S). For example «p= fi 39 S=Scalar=2 A=|0 7 5 Is [2x1 2x3 2x9 26°18 SA=|2x0 27 mn = 0 14 10 [2x6 2x2 2x8 12.4 16] In general SA = (Sa,),., (4) Multiplication of two matrices Ifthe columns of the first matrix are equal to the rows of the second matrix (known as condition of conformity) the two matrices can be multiplied. 1 A,» =(a,) and B,,, =(b,,) then (AB). Co) recone 7 rane fT mesa l46 8}, ee Abe Aaand B can be multiplied becuase the columns of matrix A are 3 and rows of matrix B are 3. The dimensions of their product AB will be 2x3. Let the product matrix be known as matrix C. It will be arived at by summing the products of the elements of the i* row of matrix A and the corresponding elements of the k* column of matrix B. Each element of the Ist row of matrix A will be multiplied by each elements of the Ist column of matrix B, then its sum will give us the first element of the product matrix C. Then each element of the let row of A will be multiplied by all the elements of the second column of B. Their sum will give us the second element of Ist row of C. Similarly each element of Ist row of A. will be multiplied by all the clements of 3rd column of matrix B, Their sum will denote the 3rd element of Ist row of C. This process will bé repeated for all the subsequent rows of A. onffiediagans cp (3x1) +(2*2)+(7«3) capadivnac, (4% 4) + (6x5)+(Bx1)_ (4x1) +(6x2)+ (8x3) (4x 7)+(6x1)-+(8%2) (1241047) G+4421) (214-2414) (16+30+8) (4+12+24) (28+6+16) cul? 28 37 oN ls4 40 50] 2,5Mlustraion 1 find AB and BA. Solution : [Ox +C1x4) x1) 412) [Gx3)+@x4) GxI+@x [(-1s—4) ($+2)]_[-19 7) L948 G-a}"[ -1 -1 [3x 1x3) x=1)+ (1x2) BA =| 3*5)-(x3) (-3x-1)+01x2) (4x3)+(-2x3) (4x-1)+(-2x2)] J[os+9 o+2 ] f-2 3] leo-6 (-1-4] "| 14 -a| Mlustration 2. 1. 1¢ *|B oO) [3 find AB and BA. Solution : AB BA= We can see : In Illustration 1 and 2, AB 4 BA 5 EES 'S'S:'=Q ~~ rrrProperties of Matrix Multiplication ; (a) Matrix multiplication is associative. Let A, [AB()],..9=[A(BO)] Matrix multiplication is distributive. Let Arges ByigAtd Coys A(B+C)=AB+AC AB and AC will be of the dimensions mxp. and C,..; then men Ban then (c)_ Matrix multiplication is not necessarily commutative, i.e, AB# BA (proved this property in Illustrations I and 2). and | (4) Matrix multiplication by an Identity matrix. Let A, then; Al= Example : AI=A Similarly 1A will be equal to A. Multiplication of a matrix by itself. IfA is @ square matrix, A°=AA. “A [By Associative Law] ‘Transpose of a Matrix ‘The transpose of a matrix is obtained by interchanging its rows into columns and columns into rows. It is denoted by.A’ or AT. Let A= (a,),., then AT = (a), For exampleProperties of the Transpose of a matrix (@) wy (Transpose of a Transposed matrix isthe original matrix.) (b) (ABy'=BrA’ (The product of matrix AB when transposed is equal to the product of Transposed matrices taken in reverse order), (©) (A+By=a'+ BY (The Transposed sum of two matrices is equal to the sum of their Transposes) Symmetric and Skew Symmetric Matrices (1) IFA™A, itis called a symmetric matrix (provided A is a square matrix) a. ‘ 2 af) wl 24) me A determinant of square matrix is a unique number associated with it, To arrive at the determinant of a matrix itis written within vertical bars. e.g Reis Rest |Al= = By 8p ~ 828g M, % For example: af; ‘| 35 Its determinant |A | a7 |Al=@x7)-($x2)=21-10=11 Determinant of a matrix of 33 is arrived at in the following way Azle te ep ay ay |weg fp Anatan| 2y/ ay age} Xn} ay fy XAy —Ay5 XA5)} +8), xy ay XA,)} For example: A than its determinant will be: a [10/3 1 fai} | aif 3 j1 0 las Jas] *4lg 2] 2(OxS—3x2)=1 (1x5 -3x4)44(x2-0x4) 2(-6)—1(-7) +4(2) -12+74+8=3 (Note - If the matrix is of one element only its determinant will be the number itself and if the ‘number is negative then the positive of that number will be its determinant). Properties of Determinants : (@) If the rows of a determinant are changed into columns or vice versa, the value of the determinant remains unchanged, For example, Jan an] 2 fan ay (Note - Determinant of matrix A is equal to the determinant of A) (b) Ina determinant if two rows (or columns) are interchanged, its absolute value remains the ic beta sien cds For ae \3 ay Similarly | c 6If all the elements of a row (or column) of a determinant are zero, the value of the determinant will also be zero, a faust alte Jo 1 -3| (©) Ifall the elements of a row (or column) of a determinant are multiplied by a number k, then its value isk times the original determinant, For example Jan, kay. kas Visi Sad sg (8) If all the elements of a row (or a column) of a determinant are written as sum (or difference) of two or more elements, then it can be written as sum (or difference) of two or more determinants. For example Janth, a antl, ay (g) Ik times of all the elements a row (or a column) are added (or subtracted) to all the corresponding elements of another row or column, the value of the determinant remains the same. For example ay tka, a tka, ay tka cise oy ay ays ay ay] Mustration 3 hey iy Prove that eee - a be bee al | a b+a c+al a) (cta-b-a) = (b-a)(c-ayfo-b) = (@-b\(b-c)(e-a) Mlustration 4 Prove that j= 7h. “| a-b b-c c-al=a?+b?+c?-3abe + b+e d+a atbSolution : (R, +R, +R,) atbte atb+e atb+c Weigel coat a-bb-c cw =(at+b+e)/a-b b-c c-a b+e cha at b+e cta atb (C, +C, -C, and C, + C, -C,) f 1-1 1 =(atb+e)/a-b b-c bre cta-b-e atb-b-c +b c-a-a+b 1 5} 0 0 =(a+b+0)|a—b 2b-c-a -2a+b+e bte a-b arc 2a-c-a ~2 acarbeey|2t7e-# 204 b+e a-b—a-e R, > R,+R, 2b-c-a+a—b —Ja+bre+ =(a+b+e) age ae a-b a-e warden Poe O-* i a-b a-c = (atb+e) [(b-Y(a-c}-(b-ay(a-b)] = (atb+e) {a*+b*+0%ab-be-ac} P-+b-+e* Babe Product of two determinants |Al|B|=|AB| (Matrices A and B should be square matrices and their dimensions should be same. Dimensions of AB] will be equal to the dimensions of || or [B|.) ‘Trace of a Matrix Every square matix has it trace which is equal to the sum of its diagonal elements. For example 1 54 A=|9 -2 3 6 7 1} Trace (tr) of A= 1-2+1=0Singular and Non Singular Matrices If the determinant of a square matrix is zero itis called a singular matrix, ic. |A| = 0 When | A| #0 matrix A is called a non-singular matrix. Minors and Cofactors of a Matrix. ‘A lower order determinant obtained after deleting the row and column is called a minor. For example far a2 an] ‘igen fora, the minors | aaa ay ay a, the minor is | In.a matrix total number of minors are equal to total number of elements When a minor is multiplied by (-1)" of the respective element, it is known as a cofactor. The co- factor of a,, in the above matrix will be ieninfagy ‘aig ry lan ax Similarly the co-factor of element a,, will be Aa) Mas en? Ay) ay Again, in a matrix there will be as many co-factors as the number of elements. (When minors are alternatively multiplied by a minus sign, they form a co-factor.) Adjoint of a Matrix ‘Transpose of a co-factor matrix is known as the adjoint matrix. For example, if the following is a co-factor matrix of matrix A. fou Satna Its adjoint will be Adj = 1 on Mlustraion : 5 Find the adjoint of the following matrix 2-1 A=|-10 4 ae A | -5|Solution = -tiadaie [3 etl Co-factor matrix of A=| 0-1. -1 Adj A=|-5 -1 0 | Tt 9 Po es Inverse of Matrix Every non-singular square matrix possesses an inverse which is denoted as A~ (if the matrix is A) A” is arrived at by the following formula. 1 A‘ = (adja) rat) (There are other methods also for ascertaining the inverse of a matrix. They will be discussed later. ‘The above method of finding inverse of a matrix is known as adjoint method of finding inverse) Note- 1. AAT =1= AA, 2. The inverse of a matrix is unique i.., there cannot be more than one inverse of a matrix. 3.1=F Mustration 6. Find the inverse of the following matrix Solution = 1 we know A ==" (Adj Al rainiad 4 AdjA | ij fe§ 1 A+ =——(Adj A) iar Mustration 7 : Find the inverse of the following matrix fi 2-1)5)- (2-15) =2+6+13 Elementary row operations and Inverse of a Matrix Row operations method is another technique of finding the inverse of a matrix. For finding the inverse, following row (or column) operations may be undertaken (a) The rows (or columns) may be inter changed. (b) All Elements of a row (or column) may be multiplied (or divided) by a non-zero constant and thus arrived row (or column) may be added or subtracted from another row (or column) (©) A row (or column) may be replaced by such row (or column) which is calculated by multiplying the original row (or column) by @ non-zero constant. For finding the inverse, we should write the matrix and an Identify matrix in augmented form. By any of the above operations, we convert the matrix into Identity matrix and the adjacent Identity matrix into the inverse matrix. For example J1 0 Jou [R, >R,) fi al {4 211_|10 PATTIE & lio Mustration 8 Find the inverse of the following matrix by Row operation method. trvarsey! A=|0 1.3 24 B Solution : 2R, and R, +R; +4 1-2 0] 0 a 4@it Solution : a-[ Solution : as-( 305 AB=BA 5-2 4-3 cote Ao(2 2)and0-(5 Stataad such that AB = BA. Also compute 3A + SB. a «(ets ale 4at+3 4b+5 3a+6=3a+4b b=15 4a+3=29 a=65 65 EXERCISES find[A +B] 10 4 a~ [8° 9 3 4 af 2 1 {> find (A-B) -6-3 3-4 -9 +5 b)_(3a+6 3b+10 5)" \4a+3 4b+5 eae) 9420 645 3a+4b 2a+b 20 3b+ 10=2a +b b 4b+5=11 and, ie " sassB-(° 6) (5a Sb) _ (Sa+9 Sb+6 (12 3)" lus. 25 27 28 @ if A=|1 1 3,8 0 2 -1 2 2; 0 t ° " find AB, A’B, AC’and CB Solution : ) AB=|1 1° 3) ]1 -1 o2-}[2 2 [ 1x24+0x14+2%2 1x14+0x-142%2 Is =| 1x241x1+3x2 — Ix1+1x-143x2 ]=|9 6 Ox2+2x14-1x2 0x1+2x-1+-Ix2] [0 -4 i) 11 oyf2 1 23 [ 1x241x14+0%2 Tel ikce o>") [> 0] =| Ox2+Ix14+2x2 Oxl+lx | le 3| 5-3 2x243x1+—1x2 2x143x-1+-102] 182 | rt 3h fe 3h 1x14+0x04+2x2 Ixl+1x0+3x2 |=| 7 Ox1+2x0+-1x2] [-2 1 1 -1 Lar Cte saas =[6 5]Solution : (5)_ Ina certain city there are 50 colleges and 400 schools. Each school and college has 18 eons, 5 clerks and one cashier. Each college in addition has one section officer and one librarian. The monthly salary of each of them is as follows Peon - Rs. 300, Clerks - Rs. 500, Cashier - Rs. 600 Section Officer - Rs. 700 and Librarian - Rs. 900. Using matrix notation find (1) total number of posts of each kind in schools and colleges taken together, (i) the total monthly salary bill of all the schools and colleges taken together. No. of colleges and schools; A= [50 400],., fe Sicha " No. of Employees. B= ani U8 $1 - -}, Salary matrix S= [300 500 600 700 900},, wsii 4 Total no. of posts AB = [50 400] lf ioe i = [8100 2250 450 50 50},, Total monthly salary of each college & schools is 300 500 18 5 1 10, fies!) fol [oer = hs | 299) bat 900 J, Total monthly bill ofall colleges & schools 10,100 A(BS) =[50 400 = 13905000) @8)-f eso | , !LESSON-1 CALCULUS, Funetions, Limits and Continuity Function AA funetion is a special type of relation that expresses how one quantity depends on another quantity For example, when money is invested at some interest rate, the interest ‘I’ depends on the length of time, this dependence can be expressed by saying that “I is a function of t™. Let A and B be two non-empty sets. A function f from A to B is a rule which associates to each element x of A a unique y of B. The element y is called the image of x under f and we write f(x) = y which is read “fof x equals y”. A is called the domain of f and B is called the co-domain of f. The set of all images of the elements of the domain is called the range of f. The elements x and y are called the independent and dependent variables respectively. f — Fig.1 1, 2,3, 4}. The diagrams in Figure 2 show a correspondence by elements of B. Which of these diagrams define a function from Example : Let A = (a, b, c} and B which elements of A are associated wi Ato B? DR es. © Solution : In figure 2 (a), each element of A is associated with a unique element of B. Thus Figure 2 (a) defines a function. In Figure 2 (6), not all elements in A are associated with elements in B. The element c in A has no image in B. Thus Figure 2 (5) does not define a function. 18In Figure 2 (c), the element a of A is not mapped with exaetly one element in B, but is mapped with 1 and 3. Thus Figure 2 (c) does not define a function, In Figure 2 (d), each element in A is mapped with one element of B (the element happens to be the same for a, b and c). Thus Figure 2 (d) defines a function from A to B. Example : On a given day, a factory can produce 0 to 4 units. The daily operating cost of the factory is given by: x (number of units) 0 1 2 3 4 _y (daily operating cost): Rs.2000 5000 7000 9000 10000 Solution: To each x (number of units) there corresponds exactly one y (daily operating cost). Thus this defines a function. The domain of the function is the set A= {0, 1, 2,-3, 4} and the range is the set B = {2000, 5000, 7000, 9000, 10000}. Algebra of Function. Iffand g are two functions, then (0 the sum of fand g, denoted by f+ g, isthe function given by Ff +9) @=f@)+ 2, (ii) the difference of fand g, denoted by fg, is the function given by G- 8) @) =/@)-8 @), (iil) the product of fand g, denoted by fis the function given by (fe) >) = f@) 8 @), (iv) the quotient of fand g, denoted by fi isthe function given by igy=L2 g(x) In each of the above operations, x is assumed to lie in the domains of both fand g. However, in the quotient, any value of x for which g(x) = 0 is excluded. Example : If f(x) = 2x— | and g (x) = 3° — 4, find the following @ f+ 8) @) ) F-9) &) (©) G@)@) (a) gx. Solution. (2) (f+ 8)(2)= f(2) +(x) = 2x-)+(0? 4x) = 27 -2x-1, (6) (f- g(x) = f@)- g(x) = (2x-1)~ (3? ~4x) =" + 6x—1, (c) (x)= f (x) g(x) =(2x-1) (x? =4x)= 2x -9x? +4x, @ f(g) = 22-24 Special Types of Functions In this section we introduce some functions that have special forms and representations. Constam Functions. A function of the form faye where c is a constant, is called a constant function. Thus to each x, f associates the same number c. For example, the functionS@) =10 is a constant function, all functional values are 10. Figure 3 shows that graph of the function f(x) = 10, a horizontal line 10 units above the X-axis. Linear Function. A function of the form Se) =ax+b rs where a and b are constants and a # 0, is called a linear © Fig.3 function. For example, the function f(x) = 2x + 1 is a linear function. The graph of linear function isa straight line. We say that the function f(x) = ax +b has slope a. Example : A manufacturer earns Rs. 4,500 in the first month and Rs. 6,000 in the second month. On plotting these points, the manufacturer observes a linear function may fit the data. (Find the linear function that fits the data. Gi) Using your model make a prediction of the earning for the third month. Solution. (i) Let the linear function be y = arr + b, where y denotes earnings, x denotes the months and a and b are constants, From the given data, we obtain 4500=a+b 0) 6000 =2a + b ‘Subtracting (i) from (ii), we get a= 1500 Substituting this value in () gives b = 3000, Thus the required linear function is y= 1500x + 3000 i) Earning for the third month is: y= 1500 (3) + 3000 = Rs. 7500. Polynomial Function. A function of the form SO) = ay xt + az" + ta, where n is a non-negative integer and dg,a).....a, are constants with a, #0, is called a ‘polynomial function in x of degree n, a, is called the leading co-efficient. For example, the function (x) x? —5x? + Tx+1 is polynomial function in x of degree 3. Note that a linear function is a polynomial of degree 1 and a quadratic function is a polynomial of degree 2. The domain of any polynomial is the set ofall real numbers.“ Rational Functions. A function of form _ ps) f@) as) where p(x) and q(x) are polynomials, is called a rational function. Absolute Value Function. For any real number x, the function f defined by xif x20 -x,if <0 f@aAxF is called the absolute value function. The domain of f is the set of all real numbers and the range is the set of non-negative real numbers. The graph of f(x) = |x| is shown 20 aFig. 4 Exponential Functions. A function defined by Si) =a where a> 0 41 and the exponent x is any real number, is called an exponential function to the base a. For example, ¥=2",y=3*and y -(3) are exponential functions. ‘The domain of an exponential function is all real numbers and the range is all positive real numbers. If.a>l, the graph of y = a' rises from left to right (Figure 5). If 0 1) function reverses the action of the exponential function and vice versa, we say that each is the inverse of the other. The graph of y= log, x (a> 1) ccan be obtained by reflecting the graph of y = a (a> 1) in the line y = x (Figure 6). ‘The two most widely used bases for logarithms are “10” and “e”, respectively. Fig. 6 Common Logarithms. Logarithms to the base 10 are celled common logarithms. Natural Logarithms. Logarithms to the base e are called natural logarithms. Natural logarithms are denoted by In or log,, or simply log. This base occurs in economic analysis and many situations involving growth or decay. ‘Some important properties of the logarithmic function, which are frequently used in calculus, are listed below : Let m, mand a be positive numbers with a #1. Then (@ og, (mm) = log, m+ log, n. (the logarithm of a product is a sum of logarithms). ‘m (i) log, (2) = log, m-- log, n. (the logarithm of a quotient is a difference of logarithms) i) log, mé = c log, m (for any number c). (the logarithm of a power of a number is the ‘exponent times a logarithm). ” wi) Property (vi) is called the change of base formula, It allows conversion of logarithms from one base to another. ‘Remark. It may be noted that log, (m+n) # log, m + log, n Functions related to Business and Economics. \n this section we present some functions which are very useful in business and economics. Demand Function. An equation that relates price per unit and quantity demanded at that price is called a demand function. Its graph is called a demand curve. If p is the price pet unit of a certain product and x is the number of units of that product that consumers will demand during some time period at that price, then we can express Loe the demand function as x=fP) Here x is the dependent variable (demanded) and p is the independent vsnegative prices and quantities are meaningless, both x and p must be non- negative. Usually, an increase in price corresponds to a decrease in quantity demanded and vice versa. Figure 7 shows demand curve which is a straight line, itis called a linear demand curve. The reader should note that in Figure 7, the horizontal axis is used for the dependent variable x and the vertical axis for the independent variable p. ‘Quantity Gupplid Fig. 8 Price per nit ‘Supply Function. An equation that relates price per unit and the quantity supplied at that price is called a supply function and its graph called a supply curve. If p denotes the price per unit and x denotes the corresponding quantity supplied, then the supply function can be expressed as *=8@) As before x and p are non-negative. Usually, an increase in price corresponds to an increase in the quantity supplied and a decrease in the price brings about a decrease in supply. Figure 8 shows a linear supply curve. Cost Function, Let C the total cost incurred in the production of x units of a commodity. Then a function, say, C=C&) relating C and x is called a cost function and its graph is ealled a cost curve. It may be noted that total cost = fixed cost + variable cost, where fixed cost (or overhead) is the sum of all costs that are independent of the level of production, such as rent, insurance ete, and variable cost is the sum of all costs that are dependent ‘on the level of production, such as cost of material, labour, etc, Revenue Function. Let R be the total revenue or income the company makes by selling x units of @ product at price p per unit. Then R is given by the formula R= px Ris called the total revenue function. Profit Function. If R(x) and C(x) be the total revenue reveived and the total cost incurred, in the production of x units of a product, then the function P given by P (x) = R(s)-C (x) is called the profict function. Break even point. The break-even point is the level of production where the revenue from the sales is ‘equal to the cost of production. At the break-even point, the company is neither making a profit nor losing money. Consumption Function. \f I denotes the total national income and C denotes the total national ‘consumption, then the funetion c=fu) relating / and C is called the consumption function. The difference between J and consumption C 23is savings S. Thus S = 1— C, Fxample : A publishing house finds thatthe cost of production directly attributed to each book is Rs. 40 and thatthe fixed costs are Rs. 25,000. If each book can be sold for Rs. 60, then determine (the cost function, Gi) the revenue funetion, Gi) the profit function, and. (iv) the break-even point. ‘Solution. (i) Let number of books published by the publishing house is x. From the given information, Variable cost = 40x and fixed cost = Rs. 25,000 Hence the total cost function, C (x), may be written as C(x) = 40x + 25000 (@ Since each book is sold for Rs. 60, the revenue function, R (x), is given by R(x) = 60x (ui) Profit function, P (x), is given by P(x) = R(x) - C(x) = 60x ~ 40x ~ 25000 = 20x ~ 25000. (iv) Atthe break-even point, P (x) = 0. That is, 20x - 25000=0 i.e,, x= 1250 Hence 1250 books should be produced and sold to achieve break-even point. Example. A profit making company wants to launch a new product. It observes thatthe fixed cost of the ‘new product is Rs. 35,000 and the variable cost per unit is Rs. $00. The revenue function for the safe of units is given by S000x - 100x*, Find (i) profit function, (ii) break-even values, and (i) the values of x that result in a loss. Solution. () If R (=), C(x) and P(x) represents the revenue function, the cost function, and the profit function, then we have R(x) =5000x~100x? C(x)=35000+500x P(x)=R(x)-C(x) = 5000x—100x? - 35000-S00x 10x? + 4500x-35000 Hence the profit funetion is P(x)=-100x? + 4500x-35000 (ii) For the break-even values, we have P@)=0 ie, 10x? + 4500x-35000 = > 2° =45x+350=0 or (x-10Xx~35)=0 > x=l0orx=35 Hence the break-even values are 10 and 35 24(iii) To find the values of x that result in a loss, we have P(x)<0 ie, —100x? + 4500x-35000<0 > x? ~45x+350>0 or (x10)-35)>0 This is possible if either x < 10 or x >35. LIMIT OF A FUNCTION Function denotes the relationship between dependent and independent variable as y = (x) is a dependent variable and x is an independent variable. An independent variable may be assigned value in two ways viz. a fixed value as x = a or tending towards certain constant as x —> a . Value of the function when independent variable is assigned, a fixed value is known as defined value of the function, but it is known as limit of the function if independent variable is tending towards certain constant. The implication is that xis not equal to a Mathematically limit of a function f(x) when x >a is denoted by lim f(x). It can be defined as limit of a function f(x) for a given value of the argument x is that constant / to which the function continuously approaches as x approaches the given value such that the difference between constant and the function may be made as small as we would like by making the argument x approaching sufficiently near to the assigned value a. Symbolically, f(x) —>/ as xa but | (x - a)| > 0. In other words, the functin f(x) is said to tend to the limit / as x tends to a if € >0 is chosen arbitrarily ‘small and it is possible to find 9 >0 such that whenever |x - al < 8, | x) - |< © ie.,,flx) can be made as close to / as we would like by taking x sufficiently close to a. It is denoted as f(x)» asx» which means f(x) is / as x tends to a. Although itis one of the most difficult concept in mathematics, it is generally used in practice. used to describe all those situations where target is such that itis possible to reach near the target, but itis not possible to achieve the target. In other words it is possible to reach near the point, but it is not possible to touch that point. For example, achieving optimum level of installed capacity or achieving optimum level of production are instances of limi ‘The entire mathematical system of differential and integral calculus is based on the concept of li of a funetion and related conditions of continuity of a function. Evaluating limit of a function On the basis of the definition of limit, limit of a function can be obtained by putting x= a + h where ht 0 ox =a —h where h->0. h is a constant introduced to avoid the equality of x and a. This method can be applied in all conditions and is known as evaluating limit by first principle. It is a direct method of evaluating limit of a function, Example. Evaluate lim f(x) = Solution : Applying direct method, et x i (+h)? =1 Ny oe eee Peg, Soe eked i L+h? +2h-1 ee =lim(h+2) (simplication) =2 Ans.Example. Evalute lim f(x) Solution : Let lim (a+h) lin f(0) =n t= mo ath—a [or ener ne Dara + | = lim /& + hee h [Applying binomial expansion] [as all the successive terms involve h which is tending towards zero] Methods of Evaluating limit of a function This limit can be evaluated under three different conditions, viz., when x tends towards a definite quantity as x-»2or.x—>-5; when x tend toward zero and when x tends towards infinity. There are different methods which can be used for evaluating limit of a function under different conditions. (all these are over and above evaluating limit by direct method.) (a) When x tends towards a definite quantity : When independent variable tends towards a definite quantity which may be positive or negative, the limit can be evaluated by any of the following methods. (i) By puting x = a : It is the easiest metod of evaluating limit. It gives defined value as limit of the function. But it can be used only when given function is a polynomial function or a rational function and denominator is equal to zero for x = a. In addition to this the method can be used only if putting x= a does not give any indeterminant form explained in the note below. Example. Evaluate lim f(a) =“= = Solution : Since f(x) is defined for x = 1, so puttingx = 1, 4q)+30 147 6_3 84 Note : Although this method is easy, but it can not be used if limit comes in indeterminant form. It is lim (2)= ob taken as in indeterminant form if it comes in any of these form, viz., 3 0" G Where b is a constant Limit is not determinable. If the defined value of a function takes any of these forms. These results are not defined in mathematics,(ii) By factorisation method : This method is used when given function is a rational function. It involves factorising numerator and denominator to the extent possible, cancelling the common factor and putting x = a inthe simplified form. 2x? = 7446 Example, Evaluate f(s) ==" When x—> 2. Solution : When x2, function is not defined, so applying factorisation method (2x-3)(x-2) < lim f(xy = GED Factorisation ig SO) = Ge Ne=D : : 2x 3x Putting x=2 Ans. 4, 9 tim f(x) = xo-5x? +2x+2 x 42x? 6x43 Solution : When x = 1, f(x) is not defined, so factorising the rational function. Example. Evaluate lim f(x) = _ =? -4x-2) (DG? +3x-3) Putting x=1 1-4@)-2 lim f(@) ==. ifO=T 30-3 Example. Evaluate f(x) il ne 8-0 Solution : Using factorisation method be ae +x atx S@) Putting fim f(@) = a +a" =na™ (iii) By rationatisatin method : This method is used when the given function is in the irrational form. The method involves rationalisation of the numerator or denominator as the case may be simplifying, the function after rationalisation putting x = a in the simplified form. The purpose of rationalisation simplify by rationalising the numerator or denominator as the case may be.Example. Evaluate lim f(x) = Tt airs Solution : When x= 2, f(x) is not defined, so rationalising the denominator. f= x4 beter v3x=2 2 aed —V3z-2 “Yess Vix=d 2 24 [Ver2 + 5x2 x+2-3x+2 _ (+2) (x-2) Ve? + V2 rf =2@¢-2) _ (+2) Vee? + Vie? =2 Putting x=2 li fe y= M2421 5 ve -4 Example. Evaluate lim f(8) = 7" p= poms Solution : Since f(x) is not defined for x = 2, Rationalising the denominator po oe el fe-Wa+Jx—2] Jx+|V2-vx-2, _ Wit 4 Vet f2—Ve=2, -2- ea elle 22. _ +2 Wee W2=yx-2 7 22 Putting x=2 ine) HA) =2 ((a-b) (a+ B)=a? -6") (b) When x tends towards zero : In case x—>0, same methods can be applied for evaluating limit depending upon nature of function. ? + 2ax+a? - Example, Evaluate lim f(x)= 0+2a(0+a? 1Example. Evaluate lig 0) Fee me Solution : Rationalising the denominator, (©) When x tends towards co: In this case, limit can be evaluated by dividing all the terms of ‘numerator and denominator by the term having maximum power among all the terms of numerator and denom inator taken together. It is in the case of rational functions. fier this putx = oo , now all the terms having x in denominator will be zero. 43x74 6x45 ple. Evaluate lim f(x)= Example. Evaluate lim {(8)="—5 5 Solution : Term having maximum power is x"; so dividing numerator as well as denominator by x° x 43x? 46x45 4@)= as (42x46) [Any number divided by infinity is equal to zero] APPLICATIONS OF LIMIT IN BUSINESS AND ECONOMICS ‘The entire theory of differential and integral calculus is based on this concept which in turn have large applications in business and economics. Not only this, itis used for testing the continuity of functions. ‘The concept limit is directly and indirectly applied in business and economics. Almost all applications are based either on the interpretation of e or geometrical progression with common ratio less than unit. The important applications related with e are continuous compounding and related with geometrical progressions are explained in other applications. 29related with e are continuous compounding and related with geometrical progressions are explained in ‘other applications. 1. Continuous compoundit 1g and discounting ‘As stated above, this application is based on ¢ interpretation. It involves compounding or discounting. In case of compounding involving interest on interest Amount = P (1 +7)! where is principle, ris rate of interest in relation to | and is time in years. It gives amount due after ¢ years if interest is compounded yearly. But if interest is compounded half-yearly effective rate is half and time is doubled. aye Hts Ay where A(2) denotes amount after interest compounded twice a year. If interest compounded quartely — aay=P (12) If interest compounded monthly — =P (et 402)=P (1+) If interest compounded m times Am) =P [uz] ™ If interest compounded continuously then number of times interest compounded will tend to be infinity; and 30So if interest is compounded continuously A = Pe” where ¢ is a constant. The values of e” are provided by ready made tables known as exponential table values of e” corresponding to rt Example, Determine the amount at the end of 4 years of an investment of Rs. 1000 if the annual interest rate is 6 per cent being compounded (@ annually (i) half-yearly continuously. (i) Amount = PC + ry = 1000 (1 +0.6)* = 1000 (1-2626) [From compound interest table] =Rs, 1262:50 (i) Amount = (+5) = 1000 (1 +-03)" = 1000 (1:2668) [From compound interest table} = Rs, 1266-80 (iil) Amount. = pe" = 1000 e# = 1000 2 = 1000 (1:2712) [From exponential table} = Rs. 1271-20. In case of discounting, itis just the reverse of compounding, r becomes rate of discount ; so P =A -21 e (1+) if discounting is annually, if itis half yearly P= 4 (' 1 *) os and when it is continously: the number if, m is tending towards oo sora ta {i)"] ‘Therefore if discounting is m times pm) = ete) =Ae" ‘Value of e* are providing by exponential table according tort 31Example. Mr. X’has borrowed certain money for 3 years on the condition that he will pay Rs. $00 at the end of 3 years. Find the money borrowed if interest compounded (i) annually, (ji) continuously at 8 per cent. Solution : Let he borrows Rs. P, then 0 A=P(+tr) or, P=A(l+r)* = 500(1+-08) = 500(0:7938) (From present value table) = Rs, 396-90. P= Ae" =500 eon) =500¢-* = 500(-786628) (From exp. table) = Rs. 393-32 app. 2, Measurement of rate of growth It is also based on e. It is used for the measurement of rate of growth of various economic phenomenon which changes continuously as population, prices etc. In such cases A= Pe If, P and £ are given r can be obtained which is the rate of growth It can be simplified in two different ways. (i) AP is a constant, and is equal to e*. Find value of rt corresponding to A/P in the exponential table. Say itis x then n= (ji) Take natural log of both s 4 rt In(e)= In [4] [lin represents natural log) or rt n= In| | [as Ine = .log of any number with same base is always 1] r=In [P (value of in | ih can be obtained from natural log table]Example. Population of Delhi had increased from 40 lacs during 1970 to 80 lakhs at the end of 1980. Find the rate of growth in population Solution : Population growth is continuous A= Pe oe" Simplifying it by both the methods (i) In the exponential table e” is equal to 2 when rf = .695 app 10r=-695 695 or 695 per cent (ii) Taking natural log of both sides 1Or=In2 -6931 10 =6-93 per eent app. 3. Other applications ‘These applications are based on the limit of sum of infinite terms of a geometrical progression being less than unit, These are explained below. Example. What will be the present value of Rs. 1,000 flowing every year at 10% rate of discount for an infinite number of years. 1000, 1000 (14-10) (1+-10)? Solution : Total present value = 1000 1 1 ‘ 1 et 0 | 1-10" @-10y forming a geometrical progression with a = I and Il 5 Which is less than one. r10 1000 | 1 4, Total present value= 1-19 | 1 1-10 = 1000 _ Rs.10000 “10 Example. Mr. X has made an initial investment of Rs. 1,000. What will be total investment after infinite 1 numberof years if 5 of the previous is invested again and again,Solution : Total investment =1000+1000 | | +1000 | 1 10 10 J i} Example. A firm has purchased a machinary for Rs.c being depreciated at r per cent per annum on diminishing balance method. Using limit, show that sum of depreciation of all the years is equal to initial cost. (r may be used as in relation to 1) Solution : Total depreciation = cr + (c- err + [(e~er)~(e~ er $ sonnet YCAE (LE Lar) FEC =P) == Pr) toss Years] PL + (Lar) #1 = PF one fyOar Total depreciation = lim fort + (I= 1) + (1 — PP east] [1+ (=r) + [C1 =P nnn years is forming a geometrical progression with a= 1 and r= (1 —r) which is less than one] 1 So total depreciation = 7 wil CONTINUITY OF FUNCTIONS Functions can also be classified as continuous and discontinuous. A function is taken as continuous if its graphical presentation gives a smooth curve. The interval for which it gives a smooth curve. Otherwise, function is known as discontinuous. ‘The continuity of a function can be tested with the help of limit concept. There are two possible cases in this situtation, viz, continuity at a point and continuity in an interval. Both the situations are ‘explained below. Continuity at a point It involves testing the continuity ofa funetion at a particular value of x. Its taken as continuous at a point ifthe following conditions are fulfilled (a) Defined value exists at that point, ic. f(a) exists. (b) Limit at that point exists i¢., lim #(x) exists (©) Both defined value and limit are equal, ie.. f(a) = ! 34is taken as discontinuous. There are different Ifany of these conditions are not fulfilled, the funet types of discontinuities based on the unfulfilled condition It is taken as missing point discontinuity if defined re does not exist. If limit does not exist at that point, the discontinuity is taken as finite discon inuity. But ifboth does not exist, the discontinuity is known as infinite discontinuity 3x ifx>1 Determine whether function is continuous atx= 1 ‘Solution : For continuity of the function, (1) Defind value, (1) = 3(1) = [as fx) = 3x when x =1] (=D? +e), (2) Left hand limit of f(), tim £0) = =l+l+1=3 xl Right hand limit of (2), lim f(x) =3()=3 ‘So both left hand and right hand limit are existing and equal, lim f()= 3 3) Both defined value and limit are existing and equal, therefore, function is continuous at eas Baample. Given f(3) => 1 for x #2 What value should be asigned to f(x) to make f(x) continous at (x=2) (+5) eH [By Factorising] Solution + lim f(x)= =Q+5)=7 So f(x) must be equal £07 for making (2) continuous atx = 2- Only then both defined value and limit will be existing and equal. 2. Continuity in an interval “The limit concept can also be used for testing the continuity ofa function in am interval. his interval may be open or close. Hence continuity in an interval may be (a) continuity in an open interval (b) continuity in a close interval (a) Continuity in an open interval: An open interval is defined as that interval in which end points are not included. Ail the values in between end points are included. Its denoted by (a ). So continuity in the open interval of (2, 6) amounts to testing continuity at all points‘ between a and b. Ifthe function is continuous at all the points in between «rand b, itis taken as ‘continuous in the given interval, otherwise not “Testing of continuity in the open interval is same as testing ata point becuase ceach point, funetion should fulfil all the three conditions for continuity It may be applied in the form of taking some points in the given interval and testing the continuity at each point separately: (b) Continuity in a close interval : A close interval is that interval in which end points are also included It is denoted by (a, b] read as close interval of a and b. The continuity of the function in this close interval requires three conditions 35.(i) Right hand continuity at the point a Gi) Continuity in the open interval of (a, b) (iii) Left hand continuity at the point b. (i) A function is taken as having right hand continuity at the point a if the following three conditions are fulfilled. (a) Defined value of f(x), ie.,f(a) is existing. (b) right hand limit of f(x) ie, lim f(x) is existing (©) Fla)= lim fc) Ifany of these conditions is not fulfilled, the function is taken as discontinuous at x = a. (ii) Continuity in the open interval of (a, 6) is same as explained earlier. (iii) Left hand continuity at this point will be existing only if (a) Defind value of f(x), ic., f(b) is existing (H)lefthand limit of /(x) te. lim f(x)isexisting (©) both are equal te. (8) lim f(x) It implies that if a function is continuous in the close interval, it is always continuous in the same open interval. (as it is one of the conditions for continuity in the the close interval). But if a function is continuous in the open interval, it may not necessarily be continuous in the close interval. It may be that function which have only one side continuity either left hand side or right hand continuity, Continuous Functions There are some functions which are always in its domain. If a function appears in any of these forms, it can be directly stated that function is continuous without applying tests. These are as follows (a) Polynomial function : A. function appearing in the form f(x)= a,x" +a, x"! 4a,x°? +..c4a,x° where n is a non-negative integer, is known as polynomial function of n® degree. Such functions are always continuous for all the interval because defined value and limit at all points exist and are equal. So if the given function is a polynomial function, it can be taken as continuous in the given interval. (b) Rational function : A rational function appearing in the form of division of two functions is taken as continuous for all the interval if it does not include any point where denominator is equal to zero. If it includes any point where denominator is equal to zero, neither defined value not limit will exist, so function will be discontinuous. It can be applied in the form as to put the denominator of rational function equal to zero and solve for x. If the given interval consists of that value of x function is taken as discontinuous, otherwise continuous. e+ Example. Given /(x) + determine all values of x for which f(x) is continuous. v9 Solution : The given f(x) is a rational function, so putting denomination x? — continuous forall intervals excluding -3 and +3. vx? -9X ER Determine its continuity in the interval (~<0,-3), (~20,-3), (3,+ 2), (3, +20), (~ x= +3 so f(x) is Example. Given f(x) = 36Solution : The given function f(x) is defined for all values except for less than 3 and greater than —3 excluding both. For all values in between ~3 and + 3, it becomes root of negative which is not defined in real number system, So limit will also not exist and function is discontinuous for value between —3 and 3 According to the given intervals. (® (,-3), funetion is continuous (ii) (-,-3), function is continuous i) (3, +20), function is continuous i) (3, +20), finetion is continuous (¥) (-3,3), flnetion is discontinuous 1 Example. Let Go) As, #2, xe R Tell for what interval the function G (x) is continuous. Solution. If x is a real number denominator it is defined only when x > 2. G(x) is Continuous for the interval (2, 20 ) APPLICATIONS IN BUSINESS AND ECONOMICS The same continuity of function is also relevant in business and economics. It can be directly applied for testing whether a function is continuous at a point or in given interval. In addition to this, it is necessary that a function must be continuous for differentiation which in turn has number of applications. Example. An electric company charges from its customers the following amount for services; Rs. 3.00 for the first 20 kilowatts hours or less, Rs. 0.10 per kilowatt hour for the next 80 kilowatt hours; and 0.08 per kilowatt hour for any hours above 100 kilowatt hours. Determine the total cost function of x kilowatt hours, 7C(x) and test its continuity at x = 20 kilowatt hour and x = 100 kilowatt hours. Solution : Accordingly, 3 if0100 At Defined value, TC (20) = 3 lim, TC(x)=3 (Comparing left hand and right hand limit) So both are existing and equal, TC(x) is continuous. Atx= 100 Defined value, 7C(100) = 11 lim 7C(x)=11 (comparing left hand and right hand limit) Function is continuous at x = 100,Example. The total cost function of a firm stating total cost at different levels of output is defined as 20x if 0200 Test where the function is continuous in the intervals (100, 200), (100, 200), (100, 200). Solution : For open interval (100, 200), TC(x) is defined as 18x which is polynomial function so it is continuous. (ii) For the close interval (100, 2000), 7C(x) is defined as 20x for.x= 100 but its right hand limit is Biven 18x, so itis not continuous at x= 100 and function is discontinuous for this interval (iii) For the interval (100, 200), 7C(x) is defined as 18x which is continuous.LESSON 2 DIFFERENTIATION Meaning of differentiation The term ‘calculus’ means method of calculation. This meaning does not have much relevance in the practical use of the term in relation to differentiation. Calculus is classified as differential and integral Differential calculus is related with average rate of change. The method involved is known as differentiation and the result obtained is known as derivative or differential co-efficient. Practically derivative can be defined as the ratio of change in the value of function to change in the value of independent variable where the change in the latter is tending towards zero. Technically, ify = f(x), dy then Jim © is the derivative of y with respect to x where Ay denotes change in y Ax denotes change in x 4 This derivative is often denoted by © of) ory Therefore, derivation is the rate of change in the value of function when limit of change in the value of independent variable is approaching zero The steps involved in differentiation are given below : (9) introduces certain change Ax (delta x) in the dependent variable x and find the corresponding change in the value of function. Technically if y = fix) then introducing Ax change in x and Ay change in y. y+ ay ay Sle + ax) + Ax)-y =f + ax) =f) i) divide both sides by x giving the ratio of change in value of a function to change in the value of an independent variable, The same is also called as average rate of change. dy fleran-f0) Therefore ay ax’ ii) Lastly, take its limit when Ax > 0, This limit must exist for the derivative. Therefore tim 4 = jim L4*A0-F0) ar a) ae 4 fx+Ax)- f(s) or ieee de aro ax‘The same is the derivative of y with respect to x and itis known as derivative by first principle. Example. If y = x’, find its derivative by first principle. Solution : Give y =x. then y+ Ay=(x+ar)* (introducing change) dys (x tary -¥ Ay = (x+y oat (apply bionomial distribution) (simplifying) Taking its limit when A 0 Ay lim * = lim and Ay end Derivative as Instantaneous Rate of Change This derivative is defined both mathematically and geometrically. According to mathematical interpretation, derivative is used both as velocity of the function and instantaneous rate of change. In physical sciences, it is used as velocity of the function giving rate of movement. In commerce and economics, derivative is used as instantaneous rate of change. Instantaneous rate of change denotes the rate of change in the value of a function at a particular value of independent variable. Derivative gives the same as it is the rate of change in y when limit of rate of change in x is tending towards zero which amounts to a particular value of x. P Example. The demand function of a commodity is x = 20. Find the rate of change in quantity demanded, Solution : Given x= 20P+aP then x4 Ax=20- which is constant at all prices. Example. The total cost of producing x units of a commdity is TC(x) = x° + 100. Show that rate of change in total cost is varying at all levels. Solution : Given TC(x) = x + 100 Introducing Ax change in x + Ary +100 x + Ax) + 100—(x? + 100) 2+ Ax? + 2x Ax + 100-2 100 aIC(x) _ 2x ‘ax which implies itis changing at all values of x. Standard Forms of Differentiation There are some standard forms of differentiation which can be used for obtaining the derivatives of the functions appearing in different forms, All these standard forms are based on the first principle of differentiation. (Proofs have been omitted). These are applicable to all forms of functions. L.If y=c(a constant) RIS 0 _ed f(x) 2If y=e.f(x) 3.If y= f(x) g(x) £0), de) BIS 81s & (Summation form)py LO x) df(x) = dg(x) sary £2 pg ae) sa a g(x) gx) 6.1f y= f(u) and w= g(x). dy _dy dk 4.lf y= f().g(2) (Product form) date an ¢ (Chain rule) 7. Implicit Funetions : Functions are also classified as explicit and implicit function. Explicit functions are characterised as those where one variable can be expressed as a function of another variable only as y = Ax). Otherwise it is taken as implicit function as fix, y) = 0. For example, y = x + 2x + 4 is an explicit function whereas x? + 2xy +)? = 0 is an implicit function. The derivative of implicit function is obtained using chain rule. For example derivative of * with respect to x can be obtained assuming u =, then du _du dy a dy de (On this basis, the rule is that all terms involving y will be first differentiated with respect to y and a r oY multiply it by Se. After this solve it for = 8. Inverse Functions : Two functions are taken as inverse if the independent variable of one function becomes the dependent variable of the other and vice-versa. For example, if y = ffx) then x = (). dy de ay Thea. ty on ae & dy Derivative of Algebraic Functions Algebraic functions are defined as those functions where quantities are related by mathematic operations such as +, -, +, power and square root only. For example, if =x" +100y or The rule of differentiation of algebraic functions is multiply the power of x in the base and reduce the power by one, It is based on the first principle. ye VEEL t TERT crave that Yat Example. If ve *ware ve+l+vx-1 Solution : Given PamMet evenl eel eve (Rationalising the denominator) vx+l—vx- Vetit+vx-1 edt ts 2d 2 xe 2a x+1-x41 2 Example. If y=-——~—, prove that £ a-Va? =x Solution : Given y= (Rationalisation) (Quotient form)Derivative of Exponential Function Another type of non-algebraic function used in business and economics is exponential functions. These functions are defined as those where independent variable appears as power of some constant base. For example y = 10° or y = e*. These functions are classified as natural and other exponential functions. Ifthe base is e ( basis of natural log system having an approximate value of 2.7183), the function is known as natural exponential, otherwise other exponential function. Such functions are often used to denote continuous growth Derivative of natural exponential functions is based on the rule if * dy as y=e", then 2 = yee’, then It can be proved by first principle (proof ignored). Derivative of the other exponential function can be obtained easily with the help of logarithmic differentiation which is explained in the next section. Example. Differentiate y = x" e*"* with respect to x, Solution : Given y =x e*"* Fa ore ee a i = fax] Example. Differentiate the following with respect tox @ y=xe’, Gi) y=, (iv) y= 10xe™, () y=(r42)e" Solution : (i) y= xe" 4 de Pur Z se. +e se dV2R os da) gle = 44(iv) y=10xe""”* 4 iol ,.40"” a S-10 ae =f 1 5 aioe [-5 50 @) ya(e+2)er? D 6g 52) , git dE+2) Bet es Met =(x+2)e"? Gaal +n? “fe wemi[ 24! [x42 Derivative of a Logarithmic Function Logarithmic Functions are also used for denoting functions used in business and economics. Such function are defined as those whose independent variable appears with log ratio as y= log ax or ) = log,x. Such functions are also classified as natural logarithmic functions, common logarithmic functions and otter ‘ogarithmie functions based on the base of log. In case of natural log, base is « [a constant with approximate value of 2.7183) as y= loge also denoted by y = Ine. But if base of log is 10, i is known as common log as y = log, Bina » « 2 = Inca! (©) Derivative of a function raised to the power another function as y = [/(2)]*. It can be differentiated only with the help of logarithmic differentiation. Taking natural log of both sides. Iny = g (x) * In fx). Differentiating both sides with respect to x 1 1 = (x)= f(x) +n fis) 86 7 BO) F(x) + In fox): 8°65) a) Sx) BIS BIS (x)+ln fQ)- eoo| y 7 Lay FOr se) 8°) |Fr Logarithmic differentiation can also be applied for differentiating algebraic and exponential functions if these appears in combined forms. Example. Differentiate the following with respect to x : @y=57 Gi)y sae Gil) y=x" (i) y = 5° . Taking natural log of both sides ny = (x + 2) Ins. Differentiating both sides with 7Gi) Dg: Ma), 6 dla’) de de de =a ax" +x"-a" Ina . [dat ] =a* +x" [a+ x-Ina — =a" -ina aos dna | atm | Taking natural log of both sides and differentiating. Iny = e- Inx Application based on derivation as instantaneous rate of change : Whenever we want to find out the rate of change in the function at a particular level then find the derivative of the function and evaluate it for that k level. Some examples are given below to explain this Example: A firm has a revenue function given by TR(x)= 10x where x is the units demanded and TR(x) is gross revenue with a production cost function given by rans] Find the rate of change in profit ifx = 1,00,000 units tion : Given TR(x): Sol 0x, TC (x)=1,00,000+50 al x () =1,00,000+ (ids Profit function, n(x) =7R (x)—TC (x) =10x~100,000-s0 |*_] {7000 | : Rate of change in profit at x will be: ao [ 2x] y <= =10-50 | 2% at | To00000 | 7 =10———= 10,000 Putting x =1,00,000 units = 19 -1:00,000 _ 10,000 So rate of change in profit at ,00,000 is zero indicating that profit is constant at this level 48Example. The demand function of a commodity at x =./200 - p” where x units are demanded when price is Rs. p per unit. Determine the level of output where rate of change in total revenue is zero. a Solution Given x= /200-p? or P=¥200=x" » TR (x)=P-x=(/200- Rate of change in TR(x) will be: STE) 00-3? +x = 200-3? - _ 200-2x? © ¥200-%" Putting it equal to zero and solving for x _ 200-2? ~ ¥200-%" 200-2x? =0 or 00 0 or x =10 units ‘Therefore rate of change in total revenue is zero at x = 10 units. APPLICATIONS, ‘The applications based on simple differentiation (derivative concept) are explained below : 1. Measurement of price elasticity of demand Price elasticity of demand is an important economic concept. It is based on law of demand. Law of demand states the quantitative relationship between price and quantity demanded and if price is high, quantity demanded is low and vice-versa. The same quantitative relationships are quantified by price ‘elasticity of demand. It is always negative because of negative relationships between price and quantity stated by law of demand. In economics, it is defined as, Relative change in quantity demanded Relative change in price Symbotically if demand function is x = f(p). ‘ar ther Ey = a P ‘This gives the price elasticity of demand for certain Apchange in price. But if price elasticity of red at given price p instead of certain change then limit of Ap will tend towards zero and oa 2 Where Ap change in price and Ax change in quantity demanded. x 49ap lim spa Ap x afk [» tim | dp x |e Mp dp If'a demand function is given and price elasticity of demand is required ata price, i is given by & 2 ‘dp x ata price p E ax where Zp, is the derivative of demand function with respect to pp isthe price at which elasticity is required, and x is the quantity demanded at that price. Example : The demand function of a commodity is x=,100- p? . Determine the price elasticity of demand (i) when price decreases from Rs. 8 to Rs. 6, (ii) at price Rs. 8. Solution : (i) Given /100— p when pHRs8 x= 6umits andwhen = p= R86 x= Buits Therefore Ap=Rs.2 Ar=~2 (i) Atp=Ra.8, x6 units ap _dyi00- x Given] Example, The linear demand funetion of a commodity shows that qunatity demanded is nil when price is Rs. 50 per unit and it is just 1000 units when price is zero. Determine the patsaeund quantity where price clasticity and demand is unit. Solution : Linear demand function can be obtained using intercept form as.imercefftam ag 16-1000 units and on y-axis is Rs. 50 [given]. eee 1000 * 50 or x+20P =1000 000-20 P. ni)Corresponding E, = a . ~20P ¥ {unit means ~1 for £,] (0.50) or x =20P i) Solving (i) and (i) simultaneously for P oo aa 1000 - 20 P= 20 P X or 40 P=1000 P=Rs.25 Corresponding x = 20(25) = 500 unit, So it has unit elasticity when P= Rs. 25 and x= $00 unit 2. Measurement of Price elasticity of supply Price elastictity of supply at a price can be measured with the help of simple differentiation in the same way as price elasticity of demand, This concept is based on the law of supply which states the positive relationship between price and quantity supplied (from firm's point of view). It is defined for a supply function : x= g (P) as Relative change in quahities supplied Relative change in price g -2 where Ap is change in price, & Ap ® oe 4p. P At given price, price elasticity of supply is given by = where ps the derivative of supply function with respect top. It always takes postive value because of positive relationship between price and quantity supplied. Example. The weekly supply of butter (x kg) depends on the price (Rs. p per ke) according to x =100 fp=12 +150 Determine the price elasticity of supply at p = Rs. 21 Solution : Given x=100 Jp—12 +150 <, whenp=R3. 21, x= 450 units pote se 311 K.P =100-=(p-12% 2 cae) = -—_50P -50Q21 _7 Qp=12)x_ 3(450) "9 3. Measurement of Price elasticity of demand and supply at equilibrium price In case demand and supply functions for a commodity are given, it is possible to measure both price elasticity of demand and supply at equilibrium price using simple differentiation. The first step is the determination of equilibrium price and quantity using demand and supply function. Equilibrium price is the Price at which both quantity demanded and supplied are equal and corresponding quantity is known as jum quantity, so X-=f(p) (demand function) and X= g(p) (Supply function) Then put fip) = g(p) and some for p, this gives equilibrium price putting this in either demand function or supply function and solving for x gives us equilibrium quantity. At this equilibrium price, price elasticity of demand is obtained by using demand function and price ¢lasticity of supply is obtained by using supply function. The only difference in this application and the previous two is that these elasticities are calculated at equilibrium price only whereas the earlier two were calculated at any arbitrary price (given). ‘Example : A firm has the following demand and supply functions P=V100—X? (Demand) 10+2P (Supply) Determine the price elasticity of demand and supply at equilibrium price. Solution : Given P = 100—X? or X¥=V100-P? or P? =100-X? For equilibrium condition , Put X=-10 +2P in the demand function P* =100-[-10+ 2?) P? =100-100+40P—4P? SP’-40P =0 P-8=0 (equilibrium price) -.P=8 Corresponding equilibrium quantity X= -10-+2(8)=6 units So price elasticity of demand at P = Rs. 8 with X= 6 units will be ax P_dvioo-P* Pp aX dP Xx =1(00-p?}"? -2p.2 = oo Py ae = 52aX P_d(-10+2P) P PX x. _2P _2(8)_8 S mH) 6 Example : A firm finds that both quantity demanded and supplied are 30 units when market price is Rs. 8 per unit. It is known that demand is nt if price is increased to Rs. 12 per unit and firm is not willing to supply if price is reduced to Rs. 5 per unit. Determine the firm’s price elasticity of demand and supply at equilibrium price assuming linear relationship between price and quantity in both cases. (0,12) Solution : The demand equation being straight line, so its (0,5) ‘equation can be obtained as P-12_X-0 12-8 0-30 or ~30(P—12)= 4x or ¥=90->P (Demand) Similarly supply function will be x-0 P-5 ‘5-8 0-30 or -30 (P-5)=-3x or X=10P+50 (supply) Price elasticity of demand and supply at equilibrium price, P= Rs. 8 will be x15 P _-18®) 2 X 2G0) p= %.P_10P_10@)_8 aa xX 30 4. Derivation of marginal revenue function [MR(x)] from total revenue function TR(x) Total revenue function, 7R(x), gives the total revenue of x units sold. It can be obtained from the demand function as TR(x)=P.x where p is the price when x units are demanded. On the other hand, ‘marginal revenue function, MR(x) gives the additional revenue of xth unit. In economies, marginal revenue is defined as change in total revenue caused by change in number of units sold as additional revenue of xth unit = 7R¢s) ~ TR(x-1). It has an important relationship with total revenue as total revenue will increase till marginal is positive, it will be zero if marginal is zero and decrease if marginal is negative. 33‘MR(x)can be obtained with the help of simple differentiation if TR(x) is given. MR(x) gives the rate of change in total revenue which in turn is also given by derivative of total revenue function. Therefore, ‘MR(2) is equal to simple derivation of TR(x) MR(x) _aTR(x) de Example : The demand function of a commodity is x=/100—p® . Determine the corresponding ‘marginal revenue function and find marginal revenue when x = 6 units. Solution : Given 100 - p? or p=V100-x? (corresponding inverse function) Example. A firm can sell 100 units if it charges Rs. 5 per unit. It knows that for each Rs. 0.10 reduction in price, it can sell 20 more units. Determine the firm’s marginal revenue function. Use it to determine marginal revenue when x = 100 units. Solution : Given P=Rs.5, Quantity demanded, x= 100 units : when P=Rs.4, ‘quantity demanded, 00 units (as for each Rs. 0.10 reduction, quantity demanded increases by 20 units, so if price declines 10 times to Rs. 4, quantity demanded also increases 10 times to 300 units), Using two point form 3-4 100-300 -200(P-5)= X-100x=-200P +1100 When X =100 units Mercion) =X 5. Measurement of Price elasticity in terms of average revenue and marginal revenue Price elasticity of demand is the ratio of relative change in quantity demanded and relative change in price. In economics there are three important methods of its measurement, viz. (i) total expenditure method, (ii) point method, (ii) are method. According to point method, price elasticity of demand at a point fon the demand curve is equal to lower half of the tangent at that point divided by upper half of his tangent, price elasticity of demand at Bis a Hip 2 exit 2C, The same result, if further analysed using relationship between average revenue and marginal revenue gives elasticity of demand ‘The same result can be provided using simple differentiation, TR(X)=P.X ATR(X) [Using product form) ap MR(x) =P +x am ax =P+xX-—P_ xes ax XE, [P= AR} (+E, is always negative] ap Altematively, MR=P+X =, X ap =P+P- 7 [dividing and multiply second form by p] Example. The demand equation of a commodity is x = 60 - P*. Determine the price elasticity of demand when marginal revenue is Rs. 4.00 Solution : Given X = 60 - p* and MR=Rs. 4.00 So price elasticity of demand requires average revenue when marginal revenue is Rs. 4. It can be obtained only if x is known at which MR = Rs. 4.00 p= Sea TR(x)= PX =(V60—x) x TR (x) a MR(x)= ee =V60=%+ ** 300-2 _2(60-X)-X 2.J60-X Gree =4 Given) or 8P=2P?-X or x= 2P?_8PUsing (i) and (i) equations 60 - P* = 2P°— 6p 3P'-8P-60=0 3P?—18P + 10P-60=0 3P [P—6] +10 (P-6]=0 GP +10)(P-6)=0 10 So cither P=—~ (not possible, therefore itis ignored) or = P=Rs.6 or AR=Rs. 6 when MR = Rs. 4 dt 6 ° AR-MR 6-4 6, Derivation of marginal cost function from total cost function : Total cost function gives the functional relationship between total cost and number of units produced. Marginal cost function gives the additional cost of last unit. It can be obtained from total cost function with the help of simple differentiation. Mc(x)= 2) Example. A firm’s total cost function is 7C (X) = X° +2000. Determine the corresponding average cost funetion, A(X) marginal cost function, M(X) and also determine the level of output where average cost equals marginal cost. Solution : Given TC(X) =X? + 2000 TT. 2000 So AC(X)=— + = x and OH x? ax (Putting both equal and solving for X X? +2000 x or 2X? =2000 X? =1000 X =10 units.MAXIMA AND MINIMA. In calculas, extreme values of a function are of two types, viz., relatively extreme and absolutely extreme. Relatively extreme values are also known as local extreme values. They are extreme in relation to surounding values of a function. Some are described as maxima and minima. Absolutely extreme values are extreme in the entire range of the function, These values are also known as global extreme values of maximum and minimum. These may be more than one relatively extreme values of a function but there is only one absolutely extreme value of a function in the figure, b f() has relatively maximum values at B and D and 4f(x) D relatively minimum at point 4 and C. But it has absolutely ‘maximum at B and absolutely minimum at C. Calculas gives only relatively extreme values.lf a profit function is given or average cost function is given, objective is to determine the level of output where cost per unit is minimum. Absolutely extreme values can be obtained from relatively extreme values by simple comparison. If a function has two relatively maximum values, then absolutely maximum can be obtained by comparing both relatively maximum, values ofa function. But if the function has only one relatively extreme value it becomes absolutely extreme also. The relatively extreme values can be obtained using calculas in the same way as explained in the determination of relatively extreme values under Successive Differentiation, dy (If y= (2), then put = 0 and solve it for x. a“ (ii) At this values of x, if ae > 0,y takes relatively minimum value, |, becomes point of inflection, and if ah <0, takes relatively maximum value. Example. If f(x) = ax? + bx + 6 a + 0, prove that the point isarelatively maximum if <0 and is relatively minimum ifa>0. Solution : Given f(x) = ax’ + 5 +c Putting it equal to zero and solving it forx for relatively extreme value Jax +b=0 x=-b/2aAtrexe 2a 2 PIO) 9 a Iwill be positive ifa> 0, so taking relatively minimum value of Ass)edaa] ost] Itwill be negative if < 0, so taking relatively minimum value of 4ac-b? 2a Applications in business and economics There are a number of important applications in business and economics based on maximum and minima. Some of these involves maximisation, others minimisation depending on the nature of the function, ‘Some of the important applications are explained below : 1, Maximisation of total revenue function : If a firm’s demand function is given, it is possible to determine the corresponding level of output ‘whose total revenue is maximum using maxima and minima. But it will be possible only if firm is operating under imperfect competition (where price decreases as firm sells more units). In case of perfect . price is constant for a firm resulting in total revenue as an increasing function. The total revenue is maximum when marginal revenue is zero, = Oand solve for x. oy pup GER) P @ pa (ii) The value of x, where 4 TR() is maximum Example. The demand function of a commodity is p =15e"*? for 00, per unit cost is (i) Put minimum corresponding average cost can be obtained by puting this x in AC(x). Example. A machine initially costs Rs. 6,400 with no scrap value. The cost of operating is Rs. 500 in the first year and increases to Rs. 800 in each successive year. Determine (i) the number of years it should be operated for minimising total operating cost per year, and (ii) corresponding cost per year. Solution. Capital cost = Rs. 6400 Operating cost = Rs.500 + Rs. 1300+ Rs. 2100....upto x years. 5 [2(500) +(x - 1) 800) [Second x term of an A.P.] x = 5 [800 + 200) = 400x" + 100x, TC(x) = operating cost + capital cost = 400x" + 100x + 6,400. Corresponding per year cost function will be : TC) = 400x+100+ AC(x)= x 1 it, take its derivative Watt. x : For minimi OT Putting it equal to cost and solving it for x. or x=4 years @AC(x) _ 12800 Atx=4 years, 5) 7% ‘therefore cost per year is minimum if machine is operated for ss 66400 4 years. Then AC(x) = 400(4) + 100+ [= = Rs. 3300. 3. Maximixation of profit function Ifa firm's demand function with total cost function is given, it is possible to determine the firm's equilibrium by maximizing the corresponding profit function. It is taken as profit, function (x) =TR(X)-TC(3). For maximizing (j) put 2) . 9 and solve for x, (ji) the value of x for which vee <0, profitis ‘maximum corresponding profit can be obtained by putting in (x) Example. The total cost function of a firm is TC(x) =x? —Sx? +28x+10 3 where TC(x) is the total cost of x units. A tax at the rate of Rs. 2 per unit of output is imposed and the producer adds it to his cost. If the market demand function is given by P=2530- 5x where P is the price per unit of output, determine the profit maximising price and output. Solution : Given P = 2530 - 5x ) 5x? +28x+10 corresponding TR6) = P.x, After tax TC(2)=5 Sx? + 28x410+2x =x? ~5x7 430x410 = (2530 - 5x)x = 2530x - 5x? x (x) = TR6) ~ TC(x) =2530x-5x* ~fP +5 0x-10 =-}x" +25008-10 For maximising (x), take its derivative w. dn(x) x* +2500 de Putting it equal to zero and solving for x —x' +2500=0 Atx= 50 units, -. profit is maximum when x= 50 units,Corresponding P=2530-5 (50) = Rs. 2280. Example. The relationship between sales, TR(x) and advertising cost, Rs. x is given by 32000x 500+ TR(x) = It is known that gross profit is funetion of xxand x(x) (ii) the value ofx which maximises (x) and (it 32000x 2 per cent of the sales. Determine (i) the corresponding net profit as a maximized (x) TRQx)= 500+x s.m(x) = Gross profit —x (advertisement cost) 8000x *500+x (i) Form maximizing it, take its first derivative w.t.t.x, da(x) _ (500+x)8000-8000x _ de (500+x) = 8000 (500) _, (500+x) Putting it equal to zero and solve for x _ 8000 (500) ~ (500+x)° 1 =0 (500 +x) = 8000 (500) 500 +x = 2000 x=Rs. 1500 Pa(x) _-8000000 Atx=Rs.1500, £2) - < fT a (500+x) 0 So a(x) is maximum when x= Rs. 1500, = Rs. 4500. 634. Minimisation of Total Cost Usually, total cost function gives the functional relationship between total cost and the number of nits produced. It means itis an increasing function, so minimisation of this is not possible. But sometimes, the total cost is defined in such a way that it decreases upto certain level and then increases. Only in such ‘cases, this application is relevant. The steps involved for minimisation are as follows : = (and solve for x (ii) The value of x for which oa 0 TC(x) is minimum, 440 Example. A cylinder with a capacity of cubic ft. is made of two types of material. The cost of ‘material of the top and bottom is Rs. 6 per sq. ft and the sides material cost Rs. 4.80 per sq. ft. Determine the dimensions of the cylinder which minimizes total cost and minimized total cost. 44 Solution : Given Volume = cubic ft. So mh= Ae cubic ft. i r 440 Tar’ sou? Corresponding cost of material of top and bottom = [Total area of top and bottom] x Rate = (2nr?)6=Rs.12nr? Cost of sides =[Total area of sides] x Rate =(2nrh) . Rs4.80 = Rs.9.60%rh, 7 ~. Total cost of material = 12nr? + 9.60 nrh TC(r)=12nr? + 9.60% =12nr? + es 64For minimising, TC(r), take its first derivative w.rt. r ATC) ny 128 Putting it equal to zero and solving it for r Corresponding = and minimised TC (2)= 484 +964 = Rs.144a 5. Maximisation of tax Revenue ‘The theory of maxima and minima can also be used for maximizing tax revenue. The method used is same as in case of optimizing other functions as total revenue function, total cost function ete. The only difference is that the level of output sold is a function of the rate of tax. Therefore total tax revenue is equal to rate of tax multiplied by units sold. “The units sold is obtained considering the production tax imposed at the rate of Rs. t per unit. It will be different in case of perfect competition and monopoly. In the case of perfect competition, output sold is, given by equilibrium price whereas in the second case, it is same as profit maximizing output given by PHuxytg P= gx) Figure 1 65equality of marginal revenue and marginal cost. ‘Therefore in the case of perfect competition, the tax imposed is added in the supply function which will shift the supply function upward and increase the equilibrium price to some output (depending on the elasticity of demand) and reduces the equilibrium quantity as shown in figure | if P = fix) (Demand function) and P = g(x) (Supply function before tax) then P = g(x) + ¢(Supply function after tax) Equilibrium output is given by putting fis) = g(x) + t and solving it for x. It will give x as a function of tax rate f ‘Total tax revenue =f. xt Therefore for maximizing tax take its derivative w.rt. f, put it equal to zero and solve for f. (ii) the PTR) value of ¢ for which <0; tax revenue is maximum. MC (x) +t In the case of monopoly, the firm adds it to the marginal cost function as shown in Figure 2 ‘The profit maximizing output is given by setting MR(x) = MC(x) + 1 and solving it for x. At this profit must be minimum. It is same as x7. Total tax Revenue, TR(L) = tx which can be maximized in the ‘same way as explained above. Example. An industry operating under competition has the demand function P = 10 - x with the supply function P= 4+ 5 Determine (i) the equilibrium quantity before tax; (ii) the equilibrium quantity after tax if tax at the rate of Rs. ¢ per unit is imposed ; (iii) the value of ¢ which maximizes tax revenue: (iv) maximized tax revenue. Solution : (i) Given P= 10-x (Demand function) and P= (Supply function before tax) Equilibrium quantity will bex lo-x=445 4 units or Corresponding equilibrium price will be, P= 10 -4=Rs. 6. (ji) After tax supply function becomes P= 4+ , +t, So new equilibrium after tax will be W-x=44 540 2 or e450 2 3 (Gil)if x14 5 4, total tax revenue will be 2 Tax Revenue ()) = (4-5 For maximizing it, take its first derivative ws. dtaxRevenue(t)_y 4 st dt 3 Putting it equal to zero and solving for 4-4 1=0 3 or 1=Rs.3 per unit Ats= Rs. 3 per unit tax Revenue(?) So tax revenue is maximum when /= Rs. 5 per unit. (iv) Maximized tax revenue =. x,LESSON 3 an ~ INDEFINITE INTEGRATION Calculus is an important branch of mathematics. It is broadly classified as differential and integral calculus. Differential calculus gives the derivative of a function used as an instantaneous rate of change Integral calculas, on the other hand, deals with the total rate of change. Integral calculus is reverse of the process of differentiation (also known as antidifferentiation) had its own applications in business and economics. Two important applications are; obtaining the original function from its derivative function and the measurement of area under curve The integral of a function is denoted by sign [ (known as integral) Integration is also related to a variable just like differentiation. So function is always followed by dx or du or any variable in relation to which function is integrated. Integration of a function can be technically defined as reverse of differentiation Let y = (x) and its derivative, fEr&)- FE) Putting it equal to f(x), s f(x) rs Then [f(a)de= f(a) +e. Left hand side denotes the integral of f"(x) with respect to x and right hand side states it as equal to f(2) + c, where f(x) is the original function and c is an arbitrary constant. The same is known as integration and the result obtained is described as indefinite integral of /"(x) with respect tox. Indefinite integral is used for obtaining the original function from its derivative. Integration is reverse of the process of differentiation. In case of differentiation, the power of variable is multiplied to the base and the power is reduced by one for algebraic function. So integral process involves increasing the power of the variable by one and dividing by the increased power. For example, if yas? +2x-5, Ba 25+2 or dy =(2x+2)ax Then [(2x+2)dr Bvtete =P 4dete. where ¢ is an arbitrary constant. This provides for that constant which has been ommitted by differentiation. The value of c can be obtained under conditions as in the above example if y value is given for certain value of x. Different Methods of Integration ‘There are different methods of integration used in different conditions. Some of these are as discussed below : 68 a(a) Simple integration. It ust involves the reversing process of differentiation for obtaining integral (i) Algebraic function : Ifthe function to be integrated is an algebraic function, the integral can be obtained by increasing the power of variable by one and dividing the varible by increased power. Some standard forms of simple integration are as follows. Litdy = f'@) dr, [fade = f(y+e 2, Ifdy = a [/"(a)de] where a is a constant, fox'erdraa ff'cnde=af(a)+e 3. dy= f (+ Allee Ji e+ hem )ie= fui aes fords =f@)+ Are. Aitdyest ds, fet.de= 2 +e Example. Find the integral of the following ( fae (ii) fae (ii) JV" ae. 1 > v v) e-2y de (2 (v) fx-2y Solution. 2 @ fra “ste (i) far= fi-de=x+e 22 . feran yt v) fox-2ytae= fox? 4x4 de =2-2x? 44x40. 3(i) Logarithmic function : If a logarithmic function where independent ‘ariable appears with a log ratio is given as y = Inx (In denotes natural log with the base e). Its derivative, gt therefore the x integral of with respect :o xis Inx or f he = Ing + 0, Therefore, it can be generalised that whenever in a rational function, numerator is the derivative of the denominator or is equal to some constant mulitplied by numerator, the integral of the function is the natural log of denominator. For example In iE x, 1 the numerator is the derivative of the x appearing in denominator; therefore, its integral is Ime +e. Example. Evaluate the following : 0 [StS a ay peal x 42x pe 43x41 43e+5 Solution : (i) Let y=x°+ 3x-+ 1 e nets. It shows that numerator is 2(2x +3) ; so applying log form : fare 2x43) n(x? 43x41) +e Feared en? Farag rae otro Lety=P+3x+5, 2. Base 6 IB Itshows that numerator is 5 Bx? +6x] Applying log form. 42x . 430745 Gili) Lety =x -28° +2, 1 It shows that numerator is [4x -4x) So applying log form :ii) Exponential function : Al those functions where independent variable appears as a power of constant base, are known as exponential function. If the base is equal to ¢, the function is known as natural exponential function as y = e'. If derivative, 2 =e". Soiits imegral, fe* dr =e" +c. pe oe oe be Similarly if y= eM: =be™ and [be de =e +0. Example. Evaluate the following ( fabel* dx i) fae* de Gil) ((2e" +e de Solution : (i) Put u=bx M4 = or de =H dk b Making this substitution: oe . Jase’ Joctdu=a fer dw ae" +e =ae™ +e. du Putting w=—x,%=-1 of de=—du. (i) Putting = or Making this substitution Jae ede = fae (—du)=—4 fet -du =-de" +e (b) Integration by substitution : In case of composite functions, the integral can be obtained by making substitution. For example. Jlrenfar ean be obtained by substituting w = f(x), and dx du F@) du du [recast oy "@),orde= 2 | ‘Therefore fr oe [Sh (3) mat Be Tbh pihervive it nat posible, The substitution is made in such a way that the integral can be simplified to the possible extent, Example. Find the integral of the following (i) [344 de Gi) fr(S-+3x)" de Gi (- Vx +3x? +Solution : (i) Let w= 3x +4, Making this substitution, [ira a= fun Gi) Letw=5+32?, -. =6x or de =H ae 6x Making this substiution fuse) de= fron’ a oe fora du ality 69 (5437) . +e 34 (iii) Let u = x* +3x? +1, Me 3x? 46x a or a= 305° +2x) Making this substitution : f 420 2 \PaaFalee Integration can also be done by parts. This method is used whgn function involves product of two or more functions. The integration of such functions is based on reversing the process of differentiation of product form. (©) Integration by parts Let y = wv. (both w and v are taken as functions of x) a nIntegrating both sides fz 4. , fy. de eae ae w =fu.dv+|v.du fucdveur— fr—du If function is a product of two functions, one is taken as u and other equal to dv. Normally the function which can be differentiated easily is taken as «and which can not be integrated easily is taken as dv. Example. Evaluate the following : @ fre” de ii) finxae (iii) fr" -Inxdx Solution : (i) w= 7 Making this substitution du fret dem fewerGi) Jinx. de= fl-inx ae Using integration by parts Let w= Inx,du= dv=1 Jidnxde= ena fats Inx-x+0 =a{nx-l]+e. (ii) For integration by parts ferns ae Let u=Inx, du=— Applications of Indefinite Integral in Business and Economics Integration is broadly classified as definite and indefinite integration. Both these have their own applications. The most important application of integration, i.e., measurement of area under a curve, is based on definite integration, but indefinite integration has its own applications. These are in the form of obtaining original function from its derivative function. For example, finding total cost function from the ‘marginal cost function. Some of these are explained below .) Derivation of total cost function and average cost function from the marginal cost function : If marginal cost function, MC(x) is integrated with respect to x, it will give total cost function, TC(x) {since MC(x) is the derivative of TC(x)]. Therefore, Joc (sy de=70 (x) + where TC'(x) is denoting the integral of MC(x) and C is arbitrary constant which was eliminated from C(x) in the process of differentiation. 7C'(x) is same as total variable cost function. ”‘The value of C can be obtained ifthe total cost of some units of xis given. Put ihe value of x in TC) = TC'G) + C= given cost and solve for C. So TC (x)= TC (x) + C (uate obtained). This C is the fixed cost part of total cost and is same as total cost at zero level of output Therefore it can be obtained by setting x = 0 in such cases. If the total cost function is obtained, average cost funetion can be obtained just be dividing the TC (4) by x (as average cost isthe total cost divided by number of units produced), if Therefore ac( = Example. The marginal cost function of manufacturing x pairs of shoss is MC(x) = 6 + 10x - 6x2, The tora cost of producing one pair of shoes is Rs. 12.00. Determine the total and average cost function, Solution : Given MC(x) = 6 + 10x - 6° TC(x) = (MC(x) de = f(6+10x-6x") de = 6x +5x" -2x' +C Given TC(1) = 6(1)+5(1)-20) +C c=3 Putting C=3inTC(x) TC(x) = 6x 45x? -2x° +3 TC(x) _ 6x+5x x and AC(x) n6e5x-207+3 x MC(x) = Tereaen where x represents the unit produced. Determine its total cost function and average cost function if cost at 2679 level of output is Rs, 900. Example, The marginal cost of producing an item is given by Solution ; MC(*)= 10(x)= r= iw Using substitution method, let du de Making this substitutionGiven total cost at zero level is Rs.900, TC(0)=Y0-+ 400 + C =900 Putting C = Rs.880 in 7C(x), T(x) =x? + 400+ 400 +880 AC(x) = Example. The cost of producing xth unit is given by MC(x) = 20 e**. Determine the corresponding total cost function and average cost function if total cost at zero level is Rs. 80. Solution : Given MC{(x) = 20 €°* TC(x) = [20e°* de _ 200% “05 = 402°" +C. +C. Using TC(0) = Rs, 80 TC(0)= 40 6050+ C= 80 C= Rs. 40 Putting C= Rs. 40 TC(x) = 40 8% +40 os cia = 0 +40 (b) Derivation of total revenue function and average revenue function from marginal revenue function indefinite integration can also be applied for obtaining total revenue function, TR(x) from marginal revenue function. MR(x), which in turn can be used for deriving average revenue function, AR(x) also known as demand function. It is as follow. TR(x) = [MR (x) dx =TR'(x)+C where TR'(x)is simply the integral of MR(x) and C is the arbitrary constant. The value of C is ‘evaluated assuming total revenue at zero level is zero. So setting TR(0) = 0, value of C is obtained, 76Corresponding to the TR(x), TR) AR(x) Example. The additional revenue of xth unit is given by MR(x) x 12x + 27. Determine its total revenue function and average revenue function, Solution : Given MR(x) = x* - 12x +27 TR(x) = [(x? ~12x+27) de =2 62427240 3 Assuming TR(0)=0 TR(0)=0+C = C=0. TR(x)=*-~6x? +27 6x? +27x Example. Find the total revenue function 7R(x) and demand function of the marginal revenue function, [C, is arbitrary constant] Putting TR(0)=0 TR(0) =— (simplified form)and 1 Example. The additional revenue of xth unit of a commodity is given by MR(3)= “ Determine the corresponding total revenue function and demand function. Solution : Given MR(x) = at 100 TR(x) = [—> - de = Fra =100Infx+2)+C ‘Assuming —_TR(0)=0 TR(0) = 100 {In2]+C C=-1001n2 So, TR(x)=100In(x+2)—100 In 2 Corresponding, DEFINITE INTEGRATION Integration is broadly classified as indefinite and definite integration. Indefinite integration involves antderivetive ofa function Its basically used for obtaining original function from its derivative function. t is known as indefinite because the constant of integration, ¢ is arbitrary Definite integral is one step ahead of indefinite integral. It is mainly used for the measurement of area under a curve. Ifa function f{x) is continuous in the close interval [a 6), then the symbol {F(a denotes the value of definite integral of F over the interval [a, 4) ‘According to this theorem, if fx) is a continuous function inthe close interval (a, 6], then the area under the curve between a and b is given by evaluating the integral of x) with respect to x with the racer end b. (These are known as lower bound and upper bound respectively). It is shown in igure | Its value can be obtained in this way. 8Fig. 1 [reo ae= Fo] = F(b)- F(a) This gives a numeric value denoting area. [Note : Value of the aribitrary constant c is zero in this case}. Example. Evaluate the following @ [Or +5x-Dde ii) fe" de iii) "rea “, 3 2 -(este-3)| 2 a (doa) (rdara 2 2 = 145.69 app. pote: a2) gd \ia Solution : @) [3x +s0-nde-( e: ea i 4 s Gi) fet de=e"|=e* (Value of e°and e'are given by exponential table) (iii) fins d= Giskall } 2 = (8in 8-8) —(2n2—2) =8in8~2in2~6 =9.249 [Value of /n 8 and in 2 are given by natural log table} 9Example. Find the area under the curve y = 4x - x? in between x= | and x Solution: Area = {(4x—x)' dr Business and Economics The most important application of definite integration is the measurement of area under a curve, Some of these are as follows : (2) Measurement of consumer's surplus : In economics, consumer's surplus is defined as the ifference between the price consumer is willing to pay and the price which he actually pays If the price Other the {0 pay. is more than the price he actually pays, the difference is consumer's surplus Otherwise there will be no consumer's surplus. The price which the consumer willing to pay is given by demand function and the price which he pays is given by market demand and supply Diagrammaticaly itis shown in figure 2. Let P = fx) isa price funetion stating the price Gonsumer 's willing to pay for different values of x and P is the price fixed by market demand and supply at which consumer is Purchasing x units. Then total price consumer i willing to pay, is given by the integral of fx) with the limits (0. whereas price actually paid is BF. So the difference, ie. area of ABP is the measurement of consumer's surplus. Therefore, Consumer's surplus = [/(s)sds ~ pe P cs [reac PE a(e,p) PHfix) Fig.2 An alternative method is to measure consumer's surplus with the help of integrating demand function in relation to price (ie., x = fp) which is inverse of price function); It involves obtaining the demand function corresponding to price function and integrating it with respect to P with the limite [P, B]where B is the price at which quantity demanded is zero. It can be obtained by setting x= 0 in 80the demand function Therefore consumer's surplus = [f'(p) dp Both gives the same result Example. Find the consumer's surplus if the consumer’s price function is p = 45 - 2x - x* and he purchase 5 units. Solution : If consumer purchases 5 units, it means market price, P =45-2(5)-(5)° =Rs.10 + Consumer's surplus = f(45—2x~ x) dx ~10(5) pe oe alte 39 app. Alternatively, inverse function of the given price function, i.., demand function will be 45-2x-8-P=0 or +2x-45+P=0 24 YA MS-P) = Ge p_, 2 {negative value not possible, so ignored] Consumer's surplus Rs.45 when x =O units} ‘amr 2 (ag— py? | -Py 3 nw (- ; s1as)-a5 es Rs.108.33 app. Example. A_monopolist’s demand and total cost function are P = 25 - x and TC(x) = 10 + 9x respectively. Determine the consumer’s surplus (assuming monopolist maximises profit). Solution : In case of monopoly, the firm supplies units where it makes maximum profit It is given by setting marginal revenue equal to marginal cost. It is shown below. Given P=25-x and TC(x)= 10+ 9x TR()=P.x=25x-¥ and = MC()=9 Setting MR(x) = MC(x) and solving for x 25-2x =9 or x= Bunit 81Profit is maximum at x =8 unit as marginal cost is constant P=25-8=Rs.17 Consume’ surplus = [(25—») de 1718) Fig3 ~ Therefore Producer's Surplus = py — Jaco ae ‘where P and are the market price and quantity supplied. (x) isthe supply function ofthe producer B ‘denotes the price producer gets by supplying xunits and [&(*)t* gives the price producer is willing to accept and the difference represents producers surplus, ‘An altemative method is to take the inverse of given supply function P = g(x) which will be * = 81) denoting x as a function of P. The integral of g'(P) with the limit (Z,,) gives the producer's Surplus. Fy is denoted the price at which producer is willing to supply any unit it can be obtained by setting x= 0 in the either function and solving for P. Therefore Producer’s Surplus Je'rra Example. The supply equation of a commodity is 1024/4300 = and market price is Rs 8.00. Find the producer’s surplus. 82Solution : Given supply equation, 19 P ~24/x or, when P =8, quantity supply will be 8 $¥5+300 or, 1600 = x +300 1300 units. Producer's surplus =8(1300)~ f 1/5300 a L Rig 2 £ (x+ ¥ : 4 3 ! 27, an] =10,400-—— | (x +300)'? 15 | HJ =10,400-7, 840= Rs. 2560. (simplification) Example. Under pure competition, the demand and supply functions of a commodity are P= TH 2and P = 1/2 ( x + 3) respectively. Determine the consumer's and producer's surplus at equilibrium price. Solution ty (Demand) 1 P= 3 (+3) (Supply) So equilibrium quantity is given by Seendme (x43) x+l 2 or, 16 - 2x +1)2 = (x + 3) (xt), #4+8x-9=0 (+9) (-1)=0 $0 2-9 es rel [as.x=-9 isnot possible)Putting x = 1, in demand or supply function, equilibrium price, P= Rs. 2, Waar So consumer's surplus = (5) dx-2(1) = (Bln (x +1)~2x) |-2 =[(8in2-2)~(8in1-0)]-2 =8n2-4 = 8(.6932)-4 = Rs.1.55 app. [asin 1=0) Producer's surplus = 2(1)~ [¢x+3)a (©) Determination of maximized Profi the maximized profit if the marginal revenue ives the rate of change in total revenue and mz X x ° Fig. 4 The area shaded represents the maximized profit. It is the area bounded by marginal revenue function MR (x) and marginal cost function MC (x) with the limit maximizing output obtained by setting MR (x) = for maximum profit‘So maximized profit = JMR (x) -MC(») dx This gives the additional profit only. So loss at zero level of output must be subtracted from this for obtaining actual profit. It is same as fixed cost in the short-run So maximized profit= (MR (x)-MC(x)) dr.—C where C is the fixed cost or loss at zero level of output, If is happen that marginal revenue is equal to marginal cost at two level of output as shown in figure 5. 5 eco" yore MC (x) flee cy -Mc(a)]dr MR(x) ox x, Fig. 5 Upto OX, marginal cost lies above marginal revenue representing loss. From ¥ to X,marginal revenue lies above marginal cost represent profit. So maximized profit is the difference between profit area and loss area. , [LMR (x) - MC(x)] de — JEM (x) MR()) de Therefore Maximized profit. = - flask) - MCC) de Example. A firm’s marginal revenue function, MR(x) = 1000 - 4x and marginal cost function, ‘MC(x) = 3x° - 118 + 1315, Determine the maximized profit using definite integration assuming fixed cost is Rs. 595. Solution : Given MR) For profit maximizing output, put MR(x) = MC(x) and solve for x. 1000 - 4x = 3x°- 18x + 1315 or, 3x°= 14x +315 = 0 1144114)’ 43) 315) 6 }000 - 4x, MC(x) 3x? - 118x + 1315, =) or ao 85But it is making maximum profit when X’= 35 only as marginal cost is increasing at this level (it can be verified by the derivative of MC(x) at x = 35. Itis positive). So Maxima profit = [0000 4n) agar? ora ol oyaeages = (3x? +114x—315) de—59s =(-x° +57x"-315x) | -595=Rs.1000BASIC MATHEMATICS OF FINANCE [SIMPLE AND COMPOUND INTEREST] Mathematics of finance deals with simple interest, compound interest, trade discount, present and the future values of annuities, nominal and the effective rate of interest, yield to maturity etc. It is very important as all these concepts are commonty used in the financial decision making Simple and Compound Interest Interest denotes the charge which is paid on borrowing money and is received on lending the money. It is based on the concept of time value of money which states that Rs.100 of today is not equal to Rs, 100 one year after. This interest may be simple or compound. Simple Interest It refers to the interest on principal only. In practice, it is applicable only when interests is paid as and when it is due. Therefore, every year, it is calculated on principal amount. For example, if interest is due annually, itis paid annually and if it is due on six month basis, itis paid on six month basis. Simple interest can be computed as bellow: Simple Interest (S.1.) = Pre. where P = principal; r = rate of interest in relation to 1, ifr is in percentages it is divided by 100: r= time period in years. Corresponding Amount = P+S.1. = P+Px. = P(I+rt) Note 1. - Principal also denotes the present value or value in the beginning or value in the zero period ‘whereas Amount denotes the future value at the * period. Note 2. - Whenever interest is paid as and when it is due, it is always assumed to be a case of simple interest. Example 1: A sum of Rs. 5000 is deposited by Mr. X in a finance company under quarterly interest scheme. Find the total interest earned by him in 5 years at 12% per annum. Solution: Interest of each quarter = Prt =5000% 2 i004 Total interest earned = Rs.150 * 5 « 4= Rs.3000 ‘The main feature of the simple interest is that the total interest for the given period is always same whether paid annually, six monthly, quarterly or monthly. Example 2: What time will be required for a sum of money to double itself if simple rate of interest is 10% per annuam, Solution: Let the sum or Principal = Rs. P Amount =2? = P(1+rt) => 2P=P(1+.100) => .10r=1 =>1=10 yearsExample 3 :If in four years Rs. 2520 amount to Rs, 3024, in what time at the same rate will Rs. 520 amounts to Rs. 611 at simple interest. Solution: Let the rate of interest = 100r% Amount = P(1+rt) 3024=2520(1 + 4r) or r=005 or Let the time period = 1 years 611=520(1+.05¢) =3t=3.Syears Example 4: What is the cash payment equivalent to Rs.297.54 due in 3 years and 6 months, simple interest being reckoned at 4% per annum? Solution: Cash payment = Principal Principal =—4_ = 295-54 _ _ps 261 ae 14{.063) 2 Example 5: What sum will discharge a debt of Rs. 5300 due after one and half year at 5% per annum simple interest doday? Solution: Sum required to discharge the debt today = Principle = Principal =—4_ =5200_— _ ps 4930.24 Lert 1.03) 2 Example 6: In how many years at 4% per annum simple interest will the interest be one quarter of the principal, Solution: Let the principal = Rs. P. Equating the different cash flows involving simple interest The equivalent value of the cash flows at different points of time involving simple interest can also be obtained at a point of time formally known as focal date. The equivalent value denotes a lump- suum equal to all the flows. In such cases it is preferable to take the help of time scale. All the flows may be denoted on the time scale (exact scale is not required). For example:- Four different flows- F,, F,, F, and F, are there at the end of each year and their equivalent value is required at 2.5" year lying in between second and third year, then it is given by the sum total of the value of all these four flows at 2.54 year. >So the flows which are on the left hand side of the focal date their future value is required and the flows which are on right hand side, their present value is required. (This rough time scale enables us in deciding whether future value of present value of the particular flow is required to arrive at the equivalent value). ' Example 7: At 5% simple interest, find the value today of the following obligations: Rs. 1000 due today, Rs. 2000 due after 6 months with interest at 6% and Rs. 4000 due in one year with interest at 8%, Solution: Since value is required in the beginning or in zero period and the flows are at the end of 6 months and | year (which are on the right hand side of focal date), present value of both the flows due at the end of 6 months and one year is required. Amount due at the end of 6 months = P(1+71) = 2000 [ +04 §)) =Rs. 2060 ‘Amount due at the end of | year = 4000 [1+.08(1)] = Rs. 4320 The value of all the flows in the beginning at 5% 2060 4320 Same can be analysed using time scale in this way =1000 =Rs. 7124.04 Rs.4000[1 +.08(1)] Rs. 1000, é T year 6 months Example 8: A man owes Rs. 500 due in 3 months with interest at 5% and Rs.1500 due in 9 months with interest at 4% if money is worth 6%, what single payment made at the end of 6 months will discharge his debts? Solution: Let the single payment at the end of six months = Rs.X X-= furture value of the amount due at the end of 3 months + present value of the amount due at the end of 9 months Amount due at the end of 3 months at 5% / : soo +«09{3)] = Ri. 506: Value of Rs, 506.25 atthe end of 6 month at 6% = 506. 2 + oof = Rs. 513.85 ” 89Amount due at the end of 9 months at 4% sno.) 98 a3 ‘The value of Rs, 1545 at the end of 6 month at 6% =154 {i oof 3 }} = Rs. 1522.16 Total amount due at the end of 6 months = Rs.1513.85 + Rs. 1522.16 = Rs. 2036.01 0 mont neers I months months Example 9: X owes Rs. 500 due in 2 months, Rs. 1000 due in 5 months and Rs. 1500 due in 8 months. He wishes to discharge his ibligation in two equal payments; one in six months and other due in 10 months. Find the payment if money is worth 6% simple interest and the 10" month is taken as focal date. Solution: Let each payment is of Rs. x. Therefore the value of both the payments at the end of 10 ‘months should be equal to value of all the obligations at the end of 10 months. f-o(all -ofof omfg => 2.02x=520+1025+1515 x=Rs.1514.85 U Example 10: X owes Y Rs. 1000 due in 6 months without interest and Rs.2000 with interest for 1 year at 6% due in 9 months. Y agrees to accept 3 equal payments; first due today, second at the end of 6 months and the third at the end of | year. Find the equal payments using one year from today as the focal date if money is worth 8% to Y.Solution: Let each payment is of Rs. A Altona of S)]ra came) =31.08A +1.04A +A=1040 + 2223.6 33.124 =1046 A= Rs. 1046.03 ‘Compound Interest It carries interest on the principal and on the interest due also. It is mainly used when interest is not Paid as and when due, Therefore, in each successive periods interest will be calculated on the principal plus the interest due. In other words, amount of each successive period becomes the principal of next Period. Thus interest of each successive period will go on increasing. For the first period, both the simple interest and the compound interest are equal. In this case- Amount (A) = P(1+ry Where A is the amount also known as future value, P is the principal or present value, r = rate of interest per annum in relation to 1 and t= time period in years. Compound interest (CI) = A-P = P[1+r} — P = PE +ry—1) and P +AC +r) “(ery This process is also known as discounting, Example 11: Mr. A deposits Rs. 100 with a finance company under cumulative interest scheme. Company offers interest at the rate of 15% per annum for 3 years. Find the amount receivable after 3 ‘years and the interest Sol Amount receivable = P(1 + ry = 10,000 (1 + .15)° = 15208.75 Interest receivied = 15208.75 ~ 10,000 = Rs. $208.75, Example 12: Mr. A deposits Rs. 5000 in a bank for 3 years offering interest at the rate of 9% per annum in the first year, 10% per annum during the second year and 11% per annum in the third year. Find his balance after 3 years. Solution: Balance after 3 years = $000 (1+.09) (1+.11) = Rs. 6654.45 Example 13: Find the sum on which the difference between the simple interest and the compound interest for 3 years at 5% per annum is Rs, 73.20.Solution: Let the sum or Principal = Rs. P. Sl= Prt =Px.05%3=.15P Cl= PU +ry—1) =P [(1.05) ~ 1] CI-st= 73.20 => PI(1.05) = 1 - 1.5] = 73.20 => P=Rs. 9600 Example 14: The compound interest on a sum of money for 3 years at 5% is Rs. 1324.05, What is the simple interest? Solution: Let the principal = Rs. P. SI=P (.05)(3) = .15P l= P(l +.05- 1] St___15_ 951625693 CI (1.05)°=1 SI =.951625693xCI 951625693 1324.05 = Rs.1260 Example 15: The difference between 2nd year and 3rd year compound interest on a certain sum at 5% ‘compound interest is Rs. 5.25. Find the sum Sulution: Let the principal = Rs. P. Third Year Compound Interest =Clof 3 years = Cl of 2 years = P{(1.05 — 1] ~ P ((1.05)°- 1] = P{(1.05)' ~ (1.05 } = (1.05) P (.05) Second Year Compound Interest = P{(1.05)? — 1] - P [(1.05) - 1] = (1.05) P (05) (i)-Gii) = 5.25 => (1.05)? P(.05)~ (1.05) P (.05) = 5.25 => (1.05) .05)? P- 5.25 => P=Rs.2000 sum of money put at compound interest amounts to Rs. $78.40 in 2 years and Rs.614.55 Example 1 in 3 years. Find the rate of interest.‘Solution: In case of compound interest, amount of 2nd years is principal of 2rd year. Third year Principal = Rs. 578.40 A=Rs. 614.55 1 =one year 614.55 =578.4001+r)1 > 1 =.0625 = 6.25% In case compounding is m times in a year, ris replaced by ~ and 1 is replaced by mt. - if compounding is 6 monthyly ie. two times in a year, r is replaced by . and 1 is replaced by 2s. ny Amount = {1+ 2) If compounding is quarterly ie. 4 time: ‘Amount = 1 aot 4) If compounding is monthly i.e. 12 times in a year then in a year, ris replaced by ~ and ris replaced by 4 7 ep Amount =f 1+ 2) If compounding is m times in a year then Amount = of But if compounding is continuous, number of times interest compounded in a year will go to infinity i.e. limit of m tends towards infinity Amount = limit fee) mon = limit P (1 +5) = ™ =Pe" where tim(14+£)" oth Example 17: Accumulate Rs. 5000 for 6 years at 10% per annum compunded quarterly. Solution: Given P = Rs. 5000 1=4x6=24 10" < Amount(A) = 5000| 1+- coi) = 5000(1.8087) = Rs. 9043.63 93It can also be sloved using log and compound interest-tables. Compound interest table gives the compound value of Re. | at different rates of interest for different periods. Using log it can writen as log A = log 5000 + 24 log 1.025 69897 + 24 x 01072 95634 . A= Antilog (3.95634) = Rs. 9043.63, Example 18 : On March 1, 1990, X borrowed Rs. 5000 at 12% compounded quartely. What did he owe con Ist Sept, 1997? Solution : Given P = Rs. 5000 2 r 03 t= 7 years and 2 quarters = 30 quarters A = 5000 (1 +.03) = Rs, 1213632 Example 19: How long will it take the sum to double if compound continuously at 10% per annum? Solution : Let Principal = Rs. P. Amount = Pee" 2 P= Pe S2=e" Taking log both sides Jog 2=.10t loge log? _ 3010 Ologe 0.4343 Example 20 : Mr. X deposits Rs. 5000 in a book for 3 years. Bank offers interest at the rate of 10% compounded quartely during first year, at 12% per annum compounded monthly during second year and at 15% per annum compounded continuously during 3rd year. Find his balance after 3 years. 93 years _ [log e= log 2.7183 = 4343) Solution : Balance after Ist year =5000/ 1-2) 4 = principal for second year Balance after second year 3 so00{ +2) (+2) 4 12 = principal for third year Balance after 3 years = s000( = Rs, $519.06(1.1268) (1.1618) = Rs. 722526 94Equating the different cash flows involving compound interest The equivalent value of different cash flows involving compound interest can also be obtained in the ‘same way as in case of simple interest. In this case also, the flows on the left hand side are compounded and the flows on the right hand side are discounted, their present value is required. Example 21 : In return of a promise to pay Rs. 800 at the end of 10 years, a person agrees to pay Rs. 100 now, Rs. 200 at the end of 6 years and a final payment at the end 12 years. If the rate of interest is 10% per annum what should the final payment be? Solution : Let the final payment = Rs. x. and the focal date be 10th year. Therefore the future value of Rs.100 +") Future value of Rs.200 + = Rs.800 Present value of Rs.x => 800=100(1 +.10)"° + 200(1 +.10)* + —*_- KS ‘4 (10) => 800 = 259.37 + 292.82+.8264x => x=Rs.299.85 Note-In such cases answer remains the same irrespective of the focal date. Example 22: The sum of Rs. 2000, Rs. and Rs. 4000 are due at the end of 2, 4 and 8 years respectively. It's proposed to replace the series of payments by a single sum of Rs. 9000 payable at the end of m years. If the rate of interest is 10% per annum effective. Find the value of n. Solution : One alternative is that the present value of given cash flows should be equal to the present value of Rs, 9000 flowing at the end of ni year. }000 4000-9000 O+10% *O.109" ~ (+ 109" 9 1652.89 + 2049.04 + 1866,03 = 2000 G10" 9000 1.10)" = ————-. = 1.61639 . Y 5567.95 Using log nnlogl.10=log1.61639 Jog 1.61639 _ .2085 = 5.038 years logl.10 0414” : Using time scale‘The other alternative is that the focal date may be taken at the end of ni year. So the value of given flows at the end of nth year should be equal to Rs. 9000. 2000(1.10)""? +3000(1.10)""* + 4000(1.10)""* = Rs.9000 ‘Same expression is given by multiplying both sides by (1+.10) in the first alternative, But it should be solved carefully. Each term is to be evaluated separately using log and not by taking log of both the sides (As log properties are not applicable in case of addition and subtraction). Example 23 : If the money is worth 5% effective, what equal payments of Rs.x at the end of first year and at the end of third year will equitably replace the obligations: Rs. 30,000 at the end of 2nd year with interest at 6% per annum compounded semi-annually and Rs. 50,000 at the end of Sth year with interest at 4% compounded quarterly, Solution : If the focal date is taken as zero period, then present value of both set of flows should be equal y2a) Amount due at the end of 2nd year = 30,04 tip) Its present value at 5% effective (1+.03) * (1+.05)" Amount due at the end of Sth year seve) 4) ~ sof 94) 4 Its present value at 5% effective (-.01” = 50,000) = Rs. 47802.54 (1+.05)° = 30,000 =Rs.30626.09 The total present value of both these obligations should be equal to the present value of both the payments of Rs. x *. 30626.09 + 47802.54 14.05 (1.05) or 1,8162x = 78428.63 or x=Rs, 4318237 Example 24 : A trader buys goods of the value of Rs. 15,000. He pays Rs. 5000 down and will pay Rs. 5000 at the end of 4 months. If the money is worth 6% compounded monthly, what kind of payment will be necessary at the end of 6 months. Solution : Let the final payment = Rs.x. 15000 = 50042000, = (eit) aa) or 15000 = $000 + 4901.24 +9705 or x= Rs. 5253.64Nomi nd the Effective rate of Interest Nominal rate of interest is the rate of interest per annum which may be compounded yearly, six monthly, quarterly, monthly or m times in a year or continously. Effective rate of interest is the rate per annum compounded only once in a year. So both these are equal if compounding is only once a year, But if compounding is more than once in a year, effective rate of interest will increase as the frequency of compounding increases (at the decreasing rate). Following are the relationship between nominal (r) and effective (R) rate of interest under two different conditions, (a) If compounding is m times in a year then P+ RY = P+ or R (b) If compounding is continuous, then PU+RY = Pe" or R=e-1 Example 25 : A money lender charges interest at the rate of $ rupees per 100 rupees payable in advance per quarter. What effective rate of interest does he charge per annum? Solution : Let the money borrowed = Rs. 100 Interest deducted in advance for the quarter = Rs. 5 So net amount received by borrower = R3. 95 5 For borrower interest rate = >= per quarter 9 effective rate per annum will be R=(42)'-1 ase =(1+ Example 26 : Mr. X deposited Rs. 10,000 in a bank for 3 years. Bank makes two offers- compounded quarterly or 8% compounded continuously. Which offer is preferable? Solution : Balance after 3 years under first-offer 13448.88 Balance after 3 years under second offer = 10,000 6% = Rs, 12712.49 Therefore first offer is acceptableAlternatively effective rate of interest per annum of both the proposals may be compared, Under = 1038 = 10.38% 10, first offer effective rate = (1+) 08328 = 8.32 Under second offer, effective rate = e% = First offer is acceptable. Relationship between nominal rates The same logic as explained above can also be used for establishing relationship between two nominal rates. For example, if interest is compounded quarterly at r, percent and the interest is ‘compounded half yearly at r, percent, then relationship between the two are given below pas ag Example 27: Find the nominal rate r compounded monthly equivalent to 6% compounded semi-annually Solution : r 71.03) -1 1 =.05926 =5.926% 98,LESSON 1 CONSTRUCTION OF FREQUENCY DISTRIBUTION AND GRAPHICAL PRESENTATION ‘What is frequency distribution Collected and classified data are presented in a form of frequency distribution. Frequency distribution is simply a table in which the data are grouped into classes on the basis of common characteristics and the number of cases which fall in each class are recorded. It shows the frequency of occurrence of different values of a single variable. A frequency distribution is constructed to satisfy three objectives : () to facilitate the analysis of data, i). tocestimate frequencies of the unknown population distribution from the distribution of sample data, and (Gi) to facilitate the computation of various statistical measures. Frequency distribution can be of two types 1, Univariate Frequency Distribution 2. Bivariate Frequency Distribution. In this lesson, we shall understand the Univariate frequency distribution. Univariate distribution incorporates different values of one variable only whereas the Bivariate frequency distribution incorporates the values of two variables. The Univariate frequency distribution is further classified into three categories : (Series of individual observations, (i) Discrete frequency distribution, and Continuous frequency distribution. Series of individual observations, is a simple listing of items of each observation. If marks of 14 students in statistics of a class are given individually, it will form a series of individual observations ‘Marks obtained in Statistics = Roll Nos. 1 Marks 60Marks in Ascending Order Marks in Descending Order 30 98 35 oy 41 8 41 85 50 81 2 80 60 1 1 60 80 32 81 50 85 41 88 al o 35 98 30 Discrete Frequency Distribution: In a discrete series, the data are presented in such a way that exact measurements of units are indicated. In a discrete frequency distribution, we count the number of times each value of the variable in data given to you. This is facilitated through the technique of tally bars. In the first column, we write all values of the variable. In the second column, a vertical bar called tally bar against the variable, we write a particular value has occurred four times, for the fifth occurrence, we put a cross tally mark (/) on the four tally bars to make a block of 5. The technique of putting cross tally bars at every fifth repetition facilitates the counting of the number of occurrences of the value. After putting tally bars for all the values in the data; we count the number of times each value is repeated and write it against the corresponding value of the variable in the third column entitled frequency, This type of representation of the data is called discrete frequency distribution, We are given marks of 42 students: 3S 51 57 40 26 43 46 M1 46 8 53 4 53 33 50 40 33 40 39955 8 1s 26 4 9 Sl 39 15 45 26 We can construct a discrete frequency distribution from the above given marks. Marks of 42 Students Tally Bars FrequencyTot 42 The presentation of the data in the form of a discrete frequency distribution is better than arranging but it does not condense the data as needed and is quite difficult to grasp and comprehend. Thit distribution is quite simple in case the values of the variable are repeated otherwise there will be hardly any condensation. Continuous Frequency Distribution: If the identity of the units about @ particular information collected, is neither relevant nor is the order in which the observations occur, then the first step of condensation is to classify the data into different classes by dividing the entire group of values of the variable into a suitable number of groups and then recording the number of observations in each group. Thus, we divide the total range of values of the variable (marks of 42 students) i.e. 59-15 = 44 into groups of 10 each, then we shall get (42/10) 5 groups and the distribution of marks is displayed by the following frequency distribution: Marks of 42 Students ‘Marks (x) ‘Tally Bars ‘Number of Students (/) 1525 25-35 3545 45-55 5565 Total ‘The various groups into which the values of a variable are classified are known classes, the length of the class interval (10) is called the width of the class. Two values, specifying the class, are 401called the class limits. The presentation of the data into continuous classes with the corresponding frequencies is known as continuous frequency distribution. There are two methods of classifying the data according to class intervals : (@ exclusive method, and Gi) inclusive method In an exclusive method, the class intervals are fixed in such a manner that upper limit of one class becomes the lower limit of the following class. Moreover, an item equal to the upper limit of a class would be excluded from that class and included in the next class, The following data are classified cn this basis, Income No. of Persons (Rs.) 200-250 50 250—300 100 300-350 70 350—400 130 400—450 50 450—S00 100 Total 500 It is clear from the example that the exclusive method ensures continuity of the data in as much as the upper limit of one class is the lower limit of the next class. Therefore, 50 persons have their incomes between 200 to 249.99 and a person whose income is 250 shall be included in the next class of 250—300, According to the inclusive method, an item equal to upper limit of a class is included in that class itself, The following table demonstrates this method. income No.of Persons (Rs) 200—249 50 250299 100 300-349 0 350—399 130 400—449 50 450499 100 Total 500 Hence in the class 200—249, we include persons whose income is between Rs, 200 and Rs. 249, Principles for Constructing Frequency Distributions Inspite of the great importance of classification in statistical analysis, no hard and fast rules are laid down for it. A statistician uses his discretion for classifying a frequency distribution and sound experi 102‘wisdom, skill and aptness for an appropriate classification of the data. However, the following guidelines must be considered to construct a frequeney distribution: 1. Type of classes: The classes should be clearly defined and should not lead to any ambiguity. They should be exhaustive and mutually exclusive so that any value of variable corresponds to only class. Number of classes: The choice about the number of classes in which a given frequency distribution should be divided depends upon the following things; (@) The total frequency which means the total number of observations in the distribution. (i) The nature of the data which means the size or magnitude of the values of the variable. (iil) ‘The desired accuracy, (iv) The convenience regarding computation of the various descriptive measures of the frequency distribution such as means, variance etc, The number of classes should not be too small or too large. Ifthe classes are few, the classification becomes very broad and rough which might obscure some important features and characteristics of the data. The accuracy of the results decreases as the number of classes becomes smaller. On the other hand, {oo many classes will result in a few frequencies in each class. This will give an irregular pattern of frequencies in different classes thus makes the frequency distribution irregular. Moreover a large number of classes. will render the distribution too unwieldy to handle. The computational work for further Processing of the data will become quite tedious and time consuming without any proportionate gain in the accuracy of the results. Hence a balance should be maintained between the loss of information in the first case and irregularity of frequency distribution in the second case, to arrive at a suitable number of classes. Normally, the number of classes should not be less than $ and more than 20. Prof. Sturges has given a formula k= 143322 logn where & refers to the number of classes and 1 refers to total frequencies or number of observations. The value of & is rounded to the next higher integer Ifm = 100 k= 1 +3322 log l00=1+6.644=8 Ifn =10,000 k= 1+3.22 log 10,000= 1 + 13.288 =14 However, this rule should be applied when the number of observations are not very small. Further, the number or class intervals should be such that they give uniform and unimodal distribution which means that the frequencies in the given classes increase and decrease steadily and there are no sudden jumps. The number of classes should be an integer preferably 5 or multiples of 5, 10, 15, 20, 25 ete. which are convenient for numerical computations. 3. Size of Class Intervals : Because the size of the class interval is inversely proportional to the number of classes in a given distribution, the choice about the size of the class interval will depend upon the sound subjective judgment of the statistician. An approximate value of the magnitude of the class interval say ican be calculated with the help of Sturge’s Rule Range 173.22 logn Where i stands for class magnitude or interval, Range refers to the difference between the largest and smallest value of the distribution, and m refers to total number of observ 103If we are given the following information; n = 400, Largest item = 1300 and Smallest item = 340, 1300-340 +3.2210g400 | 14+3.222«2.602 960 00 = 99.54 (100 a Y (100 approx.) Another rule to determine the size of class interval is that the length of the class interval should not be greater than 4th of the estimated population standard deviation. If 6 is the estimate of population standard deviation then the length of class interval is given by: i < 6/4. The size of class intervals should be taken as 5 or multiples of 5, 10, 15 or 20 for easy computations of various statistical measures of the frequency distribution, class intervals should be so fixed that each class has a convenient mid-point around which all the observations in that class cluster. It means that the entire frequency of the class is concentrated at the mid value of the class. It is always desirable to take the class intervals of equal or uniform magnitude throughout the frequency distribution. 4, Class Boundaries: If in a grouped frequency distribution there are gaps between the upper limit of any class and lower limit of the sueceeding class (as in case of inclusive type of classification), there is a need to convert the data into a continuous distribution by applying a correction factor for continuity for determining new classes of exclusive type. The lower and upper class limits of new exclusive type classes are called class boundaries. If d is the gap between the upper limit of any class and lower limit of succeeding class, the class boundaries for any class are given by: Upper class boundary = Upper class limit +44 Lower class boundary = Lower class limit — “ 4/2 is called the correction factor. ¥ Let us consider the following example to understand : Marks Boundaries 20-24 (20—0.5, 24 + 0.5) ie., 19.5—24.5 25—29 (25—0.5,29+ 0.5) ie, 24.5—29.5 30-34 005, 34 + 0.5) ie, 29.5345 3539 350.5, 39 + 0.5) ie,, 34.5—39.5 4044 (400.5, 44+ 0.5) ie, 39.5—44.5 35-341 Correction factor = S- ae ota) 5. Mid-value or Class Mark: The mid value or class mark is the value of a variable which is exactly at the middle of the class. The mid-value of any class is obtained by dividing the sum of the upper and lower class limits by 2. Mid value of a cla = 6 [Lower class limit + Upper class limit] ‘The class limits should be selected in such a manner that the observations in any class are evenly distributed throughout the class interval so that the actual average of the observations in any class is very close to the mid-value of the class. 104Open End Classes : The classification is termed as open end classification if the lower Ii lass or the upper limit of the last class or both are not specified and such classes in which one of the limits is missing are called open end classes. For example, the classes like the marks less than 20 or age above 60 years. As far as possible open end classes should be avoided because in such classes the mid-value cannot be accurately obtained. But ifthe open end classes are inevitable then it is customary to estimate the class mark or mid-value for the first class with reference to the succeeding class. In ‘other words, we assume that the magnitude of the first class is same as that of the second class. Example: Construct a frequency distribution from the following data by inclusive method taking 4 as the class interval 10 u 15 2 ul 16 19 24 29 18 25 26 32 4 "7 20 B 27 30 12 15 18 mu 36 18 15 21 28 3B 38 et B 10 6 = nz »w 19 B 31 Solution: Because the minimum value of the variable is 10 which is a very convenient figure for taking the lower limit of the first class and the magnitude of the class interval is given to be 4, the classes for preparing frequency distribution by the Inclusive method will be 10—13, 14—17, 18—21, 22—25, sanmoninsnueme 3841. Frequency Distribution Tally Bars 10-13 ut 5 4-17 wai 8 1821 vl 8 2-25 wll 7 26-29 ut ib 30-33 iM 4 3437 1 2 1 -al table from the following Weekly wages (Rs.) of 100 workers of Factory A Seams? Tonagey™ & Me yronoNEyS Salo GG ainsneeys Mai Game ates tel gy 82 | B10; 267-155 | 88 1-99, 55 TRG aneeeete 9610. si Bs cize-26oe n¢SAoier eB Fin xj IOViwy 456ue rg ABA pitseukBne 146 LO2scprig MBit! fee ZZAs 110 odin Fite aie o0 vtAAD: sbi O88 5098590 ie (MOF iABoonin 80; LOG Ge 19.86.05 oti B2isioci AD snsirenAOrtoi4sI05i> ise7R eine Me orit Ssenqir6, Hirt cis Aeomunit Sonoupett Ses brn BBiv ef: 1D Fonoreib, rrseni es» anbAS aocs ote 2% 78 0 0H 8B ROn Omens ere tysive! 3 MeAAR NY EO ea OL Solution: The lowest value is 23 and the highest 106. The difference between the lowest and highest value is 83. If we take a class interval of 10, nine classes would be made, The first class should be taken as 20—30 instead of 23—33 as per the guidelines of classification. 105Frequency Distribution of the Wages of 100 Workers Wages (Rs.) ‘Tally Bars Frequency (/) 20—-30 JALAL B 30—40 JUL u 40-50 ve 18 50—60, aun 0 60—70 wi 6 70—80 ri 5 80-90 ‘A 4 9—100 JKUAL R 100—110 uM | u Total 100 Graphs of Frequency Distributions ‘The guiding principles for the graphic representation of the frequency distributions are same as for the diagrammatic and graphic representation of other types of data. The information contained in a frequency distribution can be shown in graphs which reveals the important characteristics and relationships that are not easily discemible on a simple examination of the frequency tables. The most commonly used graphs for charting a frequency distribution are : 1. Histogram 2. Frequency polygon 3. Smoothed frequency curves 4, Ogives or cumulative frequency curves. 1, Histogram The term “histogram” must not be confused with the term ‘historigram” which relates to time charts Histogram is the best way of presenting graphically a simple frequency distribution. The statistical meaning of histogram is that it is a graph that represents the class frequencies in a frequency distribution by vertical adjacent rectangles. While constructing histogram the variable is always taken on the X-axis and the corresponding frequencies on the Y-axis. Each class is then represented by a distance on the scale that is proportional to its class-interval. The distance for each rectangle on the X-axis shall remain the same in case the class-intervals are uniform throughout; if they are different the width of the rectangles shall also change proportionately. ‘TheY-axis represents the frequencies of each class which constitute the height of its rectangle. We get a series of rectangles each having a class interval distance as its width and the frequency distance as its height. The area of the histogram represents the total frequency. ‘The histogram should be clearly distinguished from a bar diagram. A bar diagram is one-dimensional ‘where the length of the bar is important and not the width, a histogram is two-dimensional, where both the length and the width are important. However, a histogram can be misleading if the distribution has unequal class intervals and suitable adjustments in frequencies are not made. 108The technique of constructing histogram is explained for () distributions having equal class-intervals, and i) distributions having unequal class-intervals. When class-intervals are equal, take frequency on the Y-axis, the variable on the X-axis and construct rectangles. In such a case the heights of the rectangles will be proportional to the frequencies. Example: Draw a histogram from the following data Frequency 5 90—100 Solution : HISTOGRAM 20 al 5 Dus 5 310 2 Es 1 raat 0 10 2 30 40 50 60 70 80 % 100 CLASSES When class-intervals are unequal the frequencies must be adjusted before constructing a histogram. We take that class which has the lowest class-interval and adjust the frequencies of other classes accordingly. If one class interval is twice as wide as the one having the lowest class-interval we divide the height of its rectangle by two, if itis three times more we divide it by three ete., the heights will be proportional to the ratios of the frequencies to the width of the classes, 107Example: Represent the fcllowing data on a histogram. Average monthly income of 1035 employees in a construction industry is given below: Monthly Income (Rs.) No. of Workers pas cena afi gitar ata oe e-omarpirl sitet taiepe or sees Sole 600—700 25 700—800 100 800—900 150 900—1000 200 1000—1200 240 1200—1400 160 1400—1500 50 1500—1800 #0 1800 or more 20 Solution: Histogram showing monthly inc gm” & gi] z z 04 1600" 700, 1000 Ec 1400 1300 Tas * MONTHLY INCOME When mid point are given, we ascertain the upper and lower limits of each class and then construct the histogram in the same manner. Example: Draw a histogram of the following distribution : Life of Electric Lamps (hours) 1010 1030 1050 1070 1090 Solution: Since we are given the mid points, we should ascertain the class limits. To calculate the class limits of various classes, take difference of two consecutive mid-points and divide the add and subtract the value obtained from each mid-point to calculate lower and higher class-limits. Life of Electric Lamps (hours) T000—100 1020—1040 1040—1060 1060—1080 1080—1100 Frequency Firm A 10 130 482 360 18 Frequency Firm A 10 130 482 360 18 108 FirmB 287 105 26 230 352 FirmB 287 105 16 230 352 ference by 2, thenHISTOGRAM (FIRM A) HISTOGRAM (FIRM B) 3 8 3 s 8 = 8 FREQUENCY 8 FREQUENCY & 3 1000 1030 Toa0 T060 1080 1100 1000 1020 1040 1060 1080 1100 LIFE OF LAMPS, LIFE OF LAMPS 2. Frequency Polygon This is a graph of frequency distribution which has more than four sides. It is particularly effective in Comparing two or more frequency distributions. There are two ways of constructing a frequency polygon. (i) We may draw a histogram of the given data and then join by straight line the mid-points of the upper horizontal side of each rectangle with the adjacent ones. The figure so formed shall be frequency polygon. Both the ends of the polygon should be extended to the base line in order to make the area under frequency polygons equal to the area under Histogram. [NUMBER OF STUDENTS (FREQUENCY) (ii) Another method of constructing frequency polygon is to take the mid-points of the various class- intervals and then plot the frequency corresponding to each point and join all these points by straight lines. The figure obtained by both the methods would be identical 109NUMBER OF STUDENTS FREQUENCY) Frequency polygon has an advantage over the histogram. The frequency polygons of several distributions can be drawn on the same axis, which makes comparisons possible whereas histogram cannot be used in the same way. To compare histograms we need to draw them on separate graphs. 3. Smoothed Frequency Curve AA smoothed frequency curve can be drawn through the various points of the polygon. The curve is drawn by free hand in such a manner that the area included under the curve is approximately the same as that of the polygon. The object of drawing a smoothed curve is to eliminate all accidental variations which exists in the original data, while smoothening, the top of the curve would overtop the highest point of polygon particularly when the magnitude of the clas interval is large. The curve should look as regular as possible and all sudden turns should be avoided. The extent of smoothening would depend upon the nature of the data. For drawing smoothed frequency ‘curve it is necessary to first draw the polygon and then smoothen it. We must keep in mind the following points to smoothen a frequency graph: (@ Only frequency distribution based on samples should be smoothened. Gi) Only continuous series should be smoothened. j) The total area under the curve should be equal to the area under the histogram or polygon. The diagram given below will illustrate the point: WSTOCRANL FREQUENCY FOLNGON AND CVE Length of leaves emi 1104. Cumulative Frequency Curves or Ogives We have discussed the charting of simple distributions where each frequency refers to the measurement of the class-interval against which itis placed. Sometimes it becomes necessary to know the ‘number of items whose values are greater or less than a certain amount. We may, for example, be interested in knowing the number of students whose weight is less than 65 Ibs. or more than say 15.5 Ibs. To get this information, it is necessary to change the form of frequency distribution from a simple to a cumulative distribution. In a cumulative frequency distribution, the frequency of each class is made to include the frequencies of all the lower or all the upper classes depending upon the manner in which cumulation is done. The graph of such a distribution is called a cumulative frequency curve or an Ogive. There are two method of constructing ogives, namely: (@ less than method, and Gi) more than method. In less than method, we start with the upper limit of each class and go on adding the frequencies. ‘When these frequencies are plotted we get a rising curve. In more than method, we start with the lower limit of each class and we subtract the frequency of ‘each class from total frequencies. When these frequencies are plotted, we get a declining curve. This example would illustrate both types of ogives. Example: Draw ogives by both the methods from the following data, Distribution of weights of the students of a college (Ibs.) Weights No. of Students 90.S—100.5 5 100.5—110.5 34 110.5—120.5 139 1205—130.5 300 130.5—140,5 367 140.5—150.5 319 150.5—160.5 205 160.5—170.5 16 170.5—180.5 a 180.5—190.5 16 190.5—200.5 3 2005—210.5, 4 210.5—220.5 3 2205—230.5 1 Solution: First of all we shall find out the cumulative frequencies of the given data by less than method. Less than (Weights) Cumulative Frequency 100.5 5 nos120.5 1305 1405 150.5 160.5 170.5 180.5 190.5 2005 210.5 220.5 230.5, 178 478, 45 64 1369 1445 1488 1504 1507 151 1514 1515 Plot these frequencies and weights on a graph paper. The curve formed is called an Ogive. ‘COMULATIVE FREQUENGY ‘Now we calculate the cumulative frequencies of the given data by more than method. More than (Weights) 90.5 100.5 1105 120.5 ive Frequencies 1515, 1510 1476 1337130.5 140.5 150.5 160.5 1705 180.5 190.5 200.5 210.5 205 By plotting these frequencies on a graph paper, we will get a decl ‘cumulative frequency curve or Ogive by more than method. Although the graphs are a powerful and effective method of presenting statistical data, they are not under all circumstances and for all purposes complete substitutes for tabular and other forms of presentation. The specialist in this field is one who recognizes not only the advantages but also the limitations of these techniques. He knows when to use and when not to use these methods and from his experience and expertise is able to select the most appropriate method for every purpose. Example: Draw an ogive by less than method and determine the number of companies getting profits between Rs. 45 crores and Rs. 75 crores :Profit No. of Profits No. of (Rs. crores) Companies (Rs. crores) Companies 8 60—10 10 20-30 2 70-80 30-40 20 80-90 40-50 m4 90—100 1 5060 1s Profits No. of (Rs, crores) ‘Companies 2 Se ag VE BY 185TH METHOD bi ‘ Less than 20 —s es Less than 40 10 a Less oF = Bo Less than 60 » bs Less than 70 89 3 om ess than 80 %6 2 » Les than 90 % ei ie pb ech o nOs - — Profit (Rs. in Crores) suis clear from the graph that the number of companies getting profits less than Rs.75 crores is 92 and the nomber of companies getting profits less than Rs. 45 crores is 51. Hence the number of Companies getting profits between Rs. 45 crores and Rs. 75 crores is 92.~ 51 = 41 Example: The following distribution is with regard to weight in grams of mangoes of a given variety ir tangoes of weight less than 443 grams be considered unsuitable for foreign market, what is the perventage of total mangoes suitable for it? Assume the given frequency distribution to be ‘typical of the variety No, of mangoes 0 0 450459 45 420 20 460469 18 430-439 2 470-479 7 440499 54 Draw an ogive of ‘more than’ type of the above data and deduce how many mangoes will be more chan 443 grams. "4 —————————— ee ii“Solution: Mangoes weighting more than 443 gms. are suitable for foreign market. Number of mangoes ‘weighting more than 443 gms. les in the lat four classes. Number of mangoes weighing between 444 and 449 grams would be ‘Total number of mangoes weighing more than 443 gms. = 32.4 + 45 +18 + 24 Percentage of mangoes =A, 100= 52.25 Therefore, the percentage of the total mangoes suitable for foreign market is 52. OGIVE BY MORE THAN METHOD ‘Weight more than (gms.) No. of Mangoes COOIVE BY MORE THAN METHOD 410 196 420 186 430 440 450 70 460 25 | 470 7 eo a0 808070 etinaeiitsie gaibaneeienstnnttotan os on Weg i rans From the graph it can be seen that there are 103 mangoes whose weight will he more than 443 gms. and are suitable for foreign marketLESSON 2 MEASURES OF CENTRAL TENDENCY ‘What is Central Tendency ‘One of the important objectives of statisti is to find out various numerical values which explains the inherent characteristics of a frequency distribution. The first of such measures is averages. The averages are the measures which condense a huge unwieldy set of numerical data into single numerical values which represent the entire distribution. The inherent inability of the human mind to remember a large body of numerical data compels us to few constants that will describe the data. Averages provide us the gist and give a bird’s eye view of the huge mass of unwieldy numerical data. Averages are the typical values around which other items of the distribution congregate. This value lie between the two extreme observations of the distribution and give us an idea about the concentration of the values in the central part of the distribution. They are called the measures of central tendency. Averages are also called measures of location since they enable us to locate the position or Place of the distribution in question. Averages are statistical constants which enables us to comprehend in a single value the significance of the whole group. According to Croxton and Cowden, an average value is a single value within the range of the data that is used to represent all the values that series. Since an average is somewhere within the range of data, it is sometimes called a ‘measure of central value. An average is the most typical representative item of the group to which it belongs and which is capable of revealing all important characteristics of that group or ‘What are the Objects of Central Tendency ‘The most important object of calculating an average or measuring central tendency is to determine 4 single figure which may be used to represent a whole series involving magnitudes of the same variable. Second object is that an average represents the entire data, it facilitates comparison within one group or between groups of data. Thus, the performance of the members of a group can be compared with the average performance of different groups. Third object is that an average helps in computing various other statistical measures such as dispersion, skewness, kurtosis etc. Essential of a Good Average An average represents the statistical data and it is used for purposes of comparison, it must possess the following properties. idly defined and not left to the mere estimation of the observer. Ifthe defi rigid, the computed value of the average obtained by different persons shall be similar. 2. The average must be based upon all values given in the distribution. Ifthe item is not based on all value it might not be representative of the entire group of data 3. Itshould be easily understood. The average should possess simple and obvious properties. It should be too abstract for the common people. 4. It should,be capable of being calculated with reasonable care and rapidity. ‘5. It should be stable and unaffected by sampling fluctuations 6. It should be capable of further algebraic manipulation. 16Different methods of measuring “Central Tendency” provide us with different kinds of averages. “The following are the main types of averages that are commonly used: 1, Mean Arithmetic mean i) Weighted mean i) Geometric mean (iv) Harmonic mean 2. Median 3. Mode ‘Arithmetic Mean: The arithmetic mean of a series is the quotient obtained by dividing the sum of the values by the number of items. In algebraic language, if X,, Xs X,......Xware the m values of a variate X, then the Arithmetic Mean (X) is defined by the following formula: Ky Ky + Xs +. +X,) n =h Ex] - 2 Toe ao iN Example : The following are the monthly Salaries (Rs.) of ten employees in an office. Caleulate the mean salary of the employees: 250, 275, 265, 280, 400, 490, 670, 890, 1100, 1250 =x lution: x==* Solution: = = 2504275 + 2654+ 280 + 400+ 490 + 670 + 190+ 1100+1250 _ $870 _ py 557 10 10 Short-cut Method: Direct method is suitable where the number of items is moderate and the figures are small sizes and integers. But if the number of items is large and/or the values of the variate are big, then the process of adding together all the values may be a lengthy process. To overcome this difficulty of computations, a short-cut method may be used. Short cut method of computation is based ‘on an important characteristic of the arithmetic mean, that is, the algebraic sum of the deviations of 1a series of individual observations from their mean is-always equal to zero. Thus deviations of the various values of the variate from an assumed mean computed and the sum is divided by the number of items. The quotient obtained is added to the assumed mean to find the arithmetic mean: Symbolically, X =A + ES where ‘Ais assumed mean and dx are deviations = (X - A). We can solve the previous example by short-cut method. ‘Computation of Arithmetic Mean Serial Salary (Rupees) Deviations from assumed me Number x where dx (X— A), A = 400 H 250 -150 ES 215 -125 3 265 135 4 280 =120 75. 400 0 6. 490 +90 7 670 4270 8. 390 +490 9. 1100 +700 1250 +850 N=10 E dr = 1870 By substituting the values in the formula, we get X= 400 + 1820 _ Rs 597 100+ 10 Computation of Arithmetic Mean in Discrete series. In discrete series, arithmetic mean may bbe computed by both direct and short cut methods. The formula according to direct method is: Ai 4 + + = 2) DAM tLe Ky tint fy Xq) = EL where the variable values X,, X;, X, have frequencies fj, fs fandN= Lz Example. The following table gives the distribution of 100 accidents during seven days of the week in a given month. During a particular month there were 5 Fridays and Saturdays and only four each of other days. Calculate the average number of accidents per day. Days Sun, Mon, Tue. Wed. Thur, Fri, Sat. Total Number of accidents: 2000-2109 u 8 = 100 Solution: Calculation of Number of Accidents per Day ‘ Day No. of No. of Days Total Accidents Accidents in Month x f x Sunday 20 4 80 Monday 2 4 88 Tuesday 10 4 40 Wednesday 9 4 36 ‘Thursday " 4 4 Friday 8 s 40 Saturday 20 5 100 100 N=30 LsX= 428 118x -LLX_ 428 X = Spe Gp a i427= 14 accidents per day ‘The formula for computation of arithmetic mean according to the short cut method is XA pee N Where A is assumed mean, dr = (X—A) and N= 5 7, We can solve the previous example by short-cut method as given below: Calculation of Average Accidents per day Day x de=X-A i. Sax (where A = 10) Sunday 20 +10 4 +40 Monday 2 +12 4 +48 ‘Tuesday 10 +0 4 +0 Wednesday 9 -1 4 -4 ‘Thursday " +1 4 +4 Friday 8 -2 5 10 Saturday 20 +10 5 +50 30 +128 Calculation of arithmetic mean for Continuous Series: The arithmetic mean can be computed both by direct and short-cut method. In addition, a coding method or step deviation method is also applied for simplification of calculations. In any case, it is necessary to find out the mid-values of the various classes in the frequency distribution before arithmetic mean of the frequency distribution can be computed ‘Once the mid-points of various classes are found out, then the process of the calculation of arit ‘mean is same as in the case of discrete series. In case of direct method, the formula to be used: x af . when m= mid points of various classesand N = total frequency In the short-cut method, the following formula is applied: ts arte where de =(m -AyandN=Zif The short-cut method can further be simplified in practice and is named coding method. The deviations from the assumed mean are divided by a common factor to reduce their size. The sum of the products of the deviations and frequencies is multiplied by this common factor and then itis divided by the total frequency and added to the assumed mean. Symbolically 2 fd’ A N = A+ xi, where d's and i= common factor Example. Following is the frequency distribution of marks obtained by 50 students in a test of Statistics 19Marks ‘Number of Students 10 10-20 20-30 30—40 40-30 50—60 wisBas Calculate arithmetic mean by; (i) direct method, (i) short-cut method, and coding method Solution: Calculation of Arithmetic Mean -A x 7 m fm de=m-A ext fx fix (where A= 25) where i = 10 o—10 4 5 20 -20 ~2 — 80 oe 10—20 6 is 0 -10 <1 60 -6 20—30 20 25 500 0 0 0 0 30—40 10 38 350 +10 +1 100 +10 40—50 7 45 315 +20 42 140 +14 i 50—60 3 3s 165 +30 +3 90 +9 N=50 Lfm = 1440 Lfde = 190 Ed’ Direct Method: Short-cut Method: Coding Method: 28.8 marks. 19 xi =254 2 x10=25 431 Wil © Begg We can observe that answer of average marks i.e. 28.8 is identical by all methods. Mathematical Properties of the Arithmetic Mean (The sum of the deviation ofa given set of individual observations from the arithmetic mean is always zeroSymbolically, 5 (X - X)=0. It is due to this property that the arithmetic mean is characterised as the centre of gravity i.., the sum of positive deviations from the mean is equal to the sum of negative deviations. i)” The sum of squares of deviations ofa set of observations is the minimum when deviations ae taken from the arithmetic average. Symbolically, (X - X)? = smaller than & (X —any other value)” We can verify the above properties with the help of the following data: Values Deviations from X iations from Assumed Mean Xx) DK-xy -A) Eax-ay 36 7 49 16 -5 25 1 0 0 9 2 4 36 5 25 98 eas EX _ 4S, where A (assumed mean) = 10 (tii) If each value of a variable X is increased or decreased or multiplied by a constant k, the arithmetic mean also increases or decreases or multiplies by the same constant. (iv) If we are given the arithmetic mean and number of items of two or more groups, we can compute the combined average of these groups by apply the following formula: Kn = NiXi4N X where X12 refers to combined average of two groups, X1 refers to arithmetic mean of first group, X 2 refers to arithmetic mean of second group, N; refers to number of items of first group, and. No refers to number of items of second group We can understand the property with the help of the following examples. Example. The average marks of 25 male students in a section is 61 and average marks of 35 female students in the same section is $8. Find combined average marks of 60 students. ‘Solution: We are given the following information, jae Ny Ra. 5 C506 HD ae pecs N, +N; 25435 i Example: The mean wage of 100 workers in a factory, running two shifts of 60 and 40 workers respectively is Rs.38. The mean wage of 60 workers in morning shift is Rs. 40. Find the mean wage of 40 workers working in the evening shift Apply 121Solution: We are given the following information, X= 40, N, = 60, X2 = 2% Ny = 40, Kn =38, and N = 100 _ 3800-2400 _ 40 Example: The mean age of a combined group of men and women is 30 years. If the mean age of the group of men is 32 and that of women group is 27, find out the percentage of men and women in the group. Solution: Let us take group of men as first group and women as second group. Therefore, X, = 32 years, X> = 27 years, and X\, = 30 years. In the problem, we are not given the number of men and women. We can assume N, +N,= 100 and therefore, N, = 100 ~ Ny Apply 2m (Substitute N, =100-N,) 100 z 30 100 = 32 (100—N,) +27 Ny SN. 200/5 = 40% Nj = (100 ~ N,) = (100 ~ 40) = 60% Therefore, the percentage of men in the group is 60 and that of women is 40. 5 Ex (v) Because X = =~ ” nN =X = NX If we replace each item in the series by the mean, the sum of these substitutions will be equal to the sum of the individual items. This property is used to find out the aggregate values and corrected averages. ‘We can understand the property with the help of an example, Example: Mean of 100 observations is found to be 44. If at the time of computation two items are wrongly taken as 30 and 27 in place of 3 and 72. Find the corrected average. Sete: X = EX =N.X=100%44 = 4400 Corrected © X = E X + correct items ~ wrong items = 4400 + 3 + 72-30-27 =4418 Corrected average = ComeCteEX _ aR = antsCalculation of Arithmetic mean in Case of Open-End Classes Open-end classes are those in which lower limit of the first class and the upper limit of the last class are not defined. In these series, we can not calculate mean unless we make an assumption about the unknown limits. The assumption depends upon the class-interval following the first class and preceding the last class. For example: Marks No. of Students Below 15 4 1s—30 6 3045 2 45—60 8 Above 60 7 In this example, because all defined class-intervals are same, the assumption would be that the first and last class shall have same class-interval of 15 and hence the lower limit of the first class shall be zero and upper limit of last class shall be 75. Hence first class would be 0—15 and the last class 60—75. ‘What happens in this case? Marks No. of Students Below 10 4 10—30 7 30-60 10 60—100 8 Above 100 4 {mn this problem because the class interval is 20 in the second class, 30 in the third, 40 in the fourth class and so on. The class interval is increasing by 10. Therefore the appropriate assumption in this case ‘would be that the lower limit of the first class is zero and the upper limit of the last class is 150. In case of other open-end class distributions the first class limit should be fixed on the basis of succeeding class interval and the last class limit should be fixed on the basis of preceding class interval. If the class intervals are of varying width, an effort should be made to avoid calculating mean and mode. It is advisable to calculate median, Weighted Mean In the computation of arithmetic mean, we give equal importance to each item in the series. Raja Toy Shop sell : Toy Cars at Rs. 3 each; Toy Locomotives at Rs. 5 each; Toy Aeroplane at Rs. 7 each; and Toy Double Decker at Rs. 9 each. What shall be the average price of the toys sold ? Ifthe shop sells 4 toys one of each kind. oi a4 Sk ae X (Mean P <== (Mean Price) = <> = 7 In this case the importance of each toy is equal as one toy of each variety has been sold. While computing the arithmetic mean this fact has been taken care of including the price ofeach toy once only. But if the shop sells 100 toys, 50 cars, 25 locomotives, 15 aeroplanes and 10 double deckers, the importance of the four toys to the dealer is not equal as a source of earning revenue. In fact their respective importance is equal to the number of units of each toy sold, ie. the importance of Toy car is 50; the importance ‘of Locomotive is 25; the importance of Aeroplane is 15; and the importance of Double Decker is 10 Rs. 6 123It may be noted that 50, 25, 15;10 are the quantities of the various classes of toys sold. These quantities are called as ‘weights in statistical language. Weight is represented by symbol W and W represents the sum of weights. While determining the average price of toy sold these weights are of great importance and are taken into account to compute weighted mean. ELOW.X,) + (WoXp) + (W5X3) + (W,X4)) _ EW W,+W, +; + W, =W where, W,, W,, Wy, W, are weights and X,, X,, X,, X, represents the price of 4 varieties of toy. Hence by substituting the values of W,, W,, W,, W, and X,, X,, X,, Xj we get (si 3) + (25x 5) +(15%7)+(10x9) 50+ 25+15+10 Ke = 1504125 +105+90" 470 _ py 79 100 100 ‘The table given below demonstrates the procedure of computing the weighted Mean. Weighted Arithmetic mean of Toys by the Raja Shop. Toy Price per toy (Rs.) Number Sold Price x Weight % w wx Car 3 SY 150 Locomotive : 25 125 Aeroplane 7 Is 105 Double Decker 9 10 0 EW =100 EWX = 470 wx _ 470 Kw = So = = Bs.4.70 IW 100 Example: The table below shows the number of skilled and unskilled workers in two localities along with their average hourly wages. Ram Nagar ‘Shyam Nagar Worker Category Number Wages (per hour) Number Wages (per hour) Skilled 150 1.80 350 Las Unskilled 850 130 650 125, Determine the average hourly wage in each locality. Also give reasons why the results show that the average hourly wage in Shyam Nagar exceed the average hourly wage in Ram Nagar, even though in ‘Shyam Nagar the average hourly wages of both categories of workers is lower. It is required to compute weighted mean, 124Skilled 1.80 150 270 1.75 350 612.50 Unskilled 1.30 850 ios 125 65081250 Total 1000 1375 1000 142s Xe = 3% - pe1.375 Kw = 425 - Rs.1.42s i000 It may be noted that weights are more evenly assigned to the different categories of workers in ‘Shyam Nagar than in Ram Nagar. Geometric Mean : ‘we have numbers (none of them being zero), then the GM. is defined as GM.= 1% Xn In case of a discrete series, if x,, x, X, OCCUT fy fp nvesnsnne f, times respectively and N is the total frequency (i.e. N= fir. frt. sof) then In general, Ne tetiencsta) GM.= qatar at For convenience, use of logarithms is made extensively to calculate the nth root. In terms of logarithms og x, ) n ) log x, + log x, +... GM. =at[ a a= we ) whee AL refers toaiog In discrete series,G.M.= aE LeEe Ef log m and in case of continuous series, G.M.= AL“ Example: Calculate GM. of the following data ae Solution : G.M,=42x4x8 = V64=4 In terms of logarithms, the question can be solved as follows 3010, log 4 = 0.6021, and log 8 = 9.9031 Elegs. a aL te = AL (0.60206) =4 125Example: Calculate geometric mean of the following data, Maer iSing-thaftverncl pict Wf yoy alee} carted FE SPUR (SO ae eee Calculation of G.M. x log x ff flog x 5 0.6990 2 1.3980 6 0.7782 4 3.1128 7 0.8451 ii 59157 8 0.9031 10 9.0310 9 0.9542 9 8.5878 10 1.0000 6 6.0000 " Loa 2 2.0828 N=40 Ef logx =36.1281 om. At(E L282) a1 (36.281) L (0.9032) = 8.002 Nx) \ a Example: Calculate GM. from the following data x a 9.5145 10 145—19.5 15 195245 "7 245295 25 295345 18 34.5395 12 39,5445 8 Solution: Calculation of G.M. x m log m a S log m 95145 2 1.0792 10 10,7920 145-195, "7 1.2304 15 18.4560 19.5245 2 13424 17 22.8208 245-295 21 14314 25 35.7850 295345 2 1.5051 18 27.0918 345395 37 1.5682 2 188184 39.5445 2 1.6232 8 12.9850 105 Ef logm=146.7410 126146.7490 G.M.= at 105 ) = aLaamo-aie Specific uses of G.M. (i) It is used in the construction of index numbers, (i) It is also helpful in finding out the compound rates of change such as the rate of growth of population in a country. (il). Itis suitable where the data are expressed in terms of rates, ratios and percentage. (iv)_It is quite useful in computing the average rates of depreciation or appreciation (v)_ Itis most suitable when large weights are to be assigned to small items and small weights to large items, Example: The gross national product of a country was Rs. 1,000 crores 10 years earlier. It is Rs. 2,000 crores now. Calculate the rate of growth in G.N.P. Solution: In this case compound interest formula will be used for computing the average annual per cent increase of growth. he geometric Mean has certain specific uses, some of them are : P, =P,(I+r)" where P, = principal sum (or any other variate) at the end of the period. P! = principal sum in the beginning of the period. 1r= rate of increase or decrease. n= number of years. Itmay be noted that the above formula can also be written in the following form : Substituting the values given in the formula, we have r =0,0718=7.18% Hence, the rate of growth in GNP is 7.18%. Example: The price of commodity increased by 5 per cent from 2001 to 2002, 8 percent from 2002 to 2003 and 77 per cent from 2003 to 2004, The average increase from 2001 to 2004 is quoted at 26 per cent and not 30 per cent. Explain this statement and verify the arithmetic. Solution: Taking P, as the price at the end of the period, P, as the price in the beginning, we can substitute the values of P, and P, in the compound interest formula, Taking P, = 100; P, = 200.72 P,=Pil+r)" 200.72 =100(1+r)* 5 _ 200.72 ge rny[ 20072 or ary or | aa = 0.260 = 26% 127Thus increase is not average of (S + 8 + 77/3 = 30 per cent. It is 26% as found out by GM. ted G.M. : The weighted GM. is calculated with the help of the following formula GM. = fr 2:8 wren, My _ log x, x, + log x, x1 + lox, x, Example: Find out weighted GM. from the following data Group n Weights Food 48 Fuel 10 Cloth 8 House Rent 160 2 Mise. 190 Is Solution : ‘alculation of Weighted GM. Group Index Number (x) Weights (w) w log x Food 352 48 122.2320 Fuel 20 23.4240 Cloth 230 17.3936 House Rent 160 26.4492 Mise. 190 5 34.1820 225.1808 G.M. (weighted) = AL| =" S| L Example: A machine depreciates at the rate of 35.5% per annum in the first year, at the rate of 22.5% per annum in the second year, and at the rate of 9.5% per annum in the third year, each percentage being ‘computed on the actual value. What is the average rate of depreciation? Solution: Average rate of depreciation can be calculated by taking GM. Year X (values taking 100 as base) log X 100-35 5 1.8096 100-225 = 77.5 1.8893 100- 9.5=90.5_ 1.9566 Llog X = 5.6555Apply GM.=AL| £82 ].. 5.6555 = AL 1.8851 76.77 Average rate of depreciation = 100 ~ 76.77 = 23.33%. Example : The arithmetic mean and geometric mean of two values are 10 and 8 respectively. Find the values. Solution : If two values are taken as a and b, then and Jab =8 then a—b=,(a+b)' —4ab = (20) ~4x64 = 400-256 Now, we have @+ a-b=12 Solving for a and b, we get a=4 and b = 16. Harmonic Mean : The harmonic mean is defined as the reciprocals of the average of reciprocals of all items in a series. Symbolically, ml 20) HM.= In case of a discrete Hee Efrat} and in case of a continuous series, N It may be noted that none of the values of the variable should be zero. HM: Example: Calculate harmonic mean from the following data: 5, 15, 25, 35 and 45, Solution5 aase ~ MMapprex ") 4) Example : From the following data compute the value of the harmonic mean xs 15 i MBS BS AS fae 3S 1s wo 15 ‘ Solution : Calculation of Harmonic Mean éd Ss 1s 10 0 22-17 approx. agree oy Example : Calculate harmonic mean from the following distribution o-10 1020 20-30, 30—40 40-50 Solution : First of all, we shall find out mid points of the various classes. They are 5, 15, 25, 35 and 45. ‘Then we will calculate the H.M. by applying the following formulaCalculation of Harmonic Mean 1 1 x (Mid Moints) f - BE sn 5 0.200 1s Is 0.067 2s 10 0.040 35 Is 0.29 4s s 0.022 Xf=50 a The answer will be 17 (approx). ‘Application of Harmonic Mean to special cases: Like Geometric means, the harmonic mean is also ‘applicable to certain special types of problems. Some of them are: (i) fin averaging time rates, distance is constant, then H.M. is to be calculated. Example: A man travels 480 km. a day. On the first day he travels for 12 hours @ 40 km. per hour and second day for 10 hours @ 48 km. per hour. On the third day he travels for 1.5 hours @ 32 km. per hour. Find his average speed. Solution: We shall use the harmonic mean, N 3 3 BM a ao km. per hour (approx.). x) 4° 48°32 ‘The arithmetic mean would be eee = 40. km. per hour i If im averaging the price data, the prices are expressed as “quantity per rupee”. Then harmonic mean should be applied. Example: A man purchased one kilo of cabbage from each of four places at the rate of 20 kg 16 8 12 kg. and 10 kg. per rupees respectively. On the average how many kilos of cabbages he has purchased per rupee. N 4 44240 = 13.5 kg. per rupee. 1) it 2 ee x) 20°16'12 "10 POSITIONAL AVERAGES Solution: HM.= Median ‘The median is that value of the variable which divides the group in two equal parts. One part comprising the values greater than and the other all values less than median, Median of a distribution may be efined as that value of the variable which exceeds and is exceeded by the same number of observation. It is the value such thatthe number of observations above it is equal to the number of observations below it. Thus ‘we know that the arithmetic mean is based on al items of the distribution, the median is positional average, that i, it depends upon the position occupied by a value in the frequency distribution. 134‘When the items of a series are arranged in ascending or descending order of magnitude the value of the middle item in the series is known as median in the case of individual observation. ‘Symbolically, inet Median = size of | N*! jie If the number of items is even, then there is no value exactly in the middle of the series. In such a situation the median is arbitrarily taken to be halfway between the two midddle items. Symbolically, Example: Find the median of the following series: ( 8,4,8,3,4,8,6,5, 10, Gi) 15,12,5,7,9,5; 11,28. Solution : ‘Computation of Median wo Serial No. Serial No. N=8 For (i) series, Median size of ‘) thitem = size of the 2" th item = size of Sthitem=6 ) + For (ii) series, — Median = size of }ehitem = sie ofthe St item __ Size of 4th item +size of Sth item _9+11 3 2 10 Location of Median in Discrete series: In a discrete series, medium is computed in the following manner: (i) Arrange the given variable data in ascending or descending order. Gi) Find cumulative frequencies.iat rast le (RE (iv) Locate median according to the size ie., variable corresponding to the size or for next cumulative frequency. Example: Following are the number of rooms in the houses of a particular locality. Find median of the data: No.of rooms: 3 4 5 6 7 8 No. ofhouses: 38 654 3 2 2 2 Solution: Computation of Median f No. of Houses ‘Cumulats_: Frequency 7” og 38 38 2 +1 1059+1 Median = sizeof (4) tm sizeof 5th item = 530th item. Median lies in the cumulative frequency of 692 and the value corresponding to this is 4 ‘Therefore, Median = 4 rooms. In a continuous series, median is computed in the following manner: (Arrange the given variable data in ascending or descending (ii) Ifinclusive series is given, it must be converted into exclusive series to find real class intervals. (ii) Find cumulative frequencies N (iv) Apply Median = size of th item to ascertain median class Apply formula of interpolation to ascertain the value of median, Nag Nah Median =, +n) or Median « 4-2 =) refers to lower limit of median class, refers to higher limit of median class, refers cumulative frequency of previous to median class, refers to frequency of median class, 133Example: The following table gives you the distribution of marks secured by some students in an examination: Marks No. of Students 0-20 2 21-30 48 3140 41—S0 84 51-60 48 61—70 36 71-80 31 & Find the median marks. Calculation of Median Marks Marks No. of Students 2) y 0-20 2 a 21-30 38 80 3140 120 200 41-30 84 284 5160 48 332 61—70 36 368 71-80 31 399 Median = size of Nah item = size of 222th ite = 199th tem, which lies in (31—40) group, therefore the median class is 30.5—40.5. ‘Applying the formula of interpolation. a x(h-h) f =305+ S80 .(10)=305+ 195 = 40.46 marks. Related Positional Measures: The median divides the series into two equal parts. Similarly there are certain other measures which divide the series into certain equal parts. There are first quartile, third quartile, deciles, percentiles etc. Ifthe items are arranged in ascending or descending order of magnitude, Q,is that value which covers 1/4th of the total number of items. Similarly, if the total number of items are divided into ten equal parts, then, there shall be nine deciles. ‘Symbotically, First quartile(Q,) = scoot (“a item 134Third quartile (Q,) = size of we 2 th item First decile (D,) = size of (52) thitem 6(N +1) Sixth decile (D,) = size of th item (N+ First percentile (P.) = size of | thitem ic (700 Once values of the items are found out, then formulae of interpolation are applied for ascertaining the value of Q,, Q,, D,, Dy, Py, ete. Example: Calculate Q,, 0,, D, and P, from following data: Marks: Below 10 10-20 20-40 40-60 No. of Students: 8 10 2 25 Solution: Calculation of Positional No. of Students (9) Q,=sizeot Nth item = 2 20th item Hence Q, lies in the class 20—40, apply 0, Cf, =18, f =22 and i=(/,-1,)=20 By substituting the values, we get 2,=20+20=18),.29=20+1.8-218 Similarly, we can calculate sizeof “Nth item => item = 60th item 135Hence Q, lies in the class 40—60, apply x ~e 3N =h+4——xi wheres =40, 2% -60, cf =40, f=25, : 4 x20=40+16=56 (60-40) 5 of Bun item = 16th item. Hence D, lies in the class 10—20. 2N_4, 10 2N + xi where 4 =10, —=16, Ch, Fi 4 10+ (5-9) 19 -10+8=18 10 ize of 2 th item = 2*80 th item = 4th item. Hence P; liesin the class O— 10. 100 100 n of Missing Frequencies: Example: In the frequency distribution of 100 families given below; the number of families corresponding to expenditure groups 20—40 and 60—80 are missing from the table. However the median is known to be 0. Find out the missing frequencies. Expenditure: 0-20 20-40 40-60 60-80 80100 No. of families: 4 i Fa 2 1s Solution: We shall assume the missing frequencies for the classes 20—40 to be x and 60—80 to y Expenditure (Rs.) No. of Families Ch 0-20 4 4 20—40 x atx 40—60 n 14427 +x y 4ltxty Is 4l+iS+x+y N=100=56+x+y From the table, we have N= F =56+x+y=100. 136x+y= 100-56 +44, Median is given as 50 which lies in the class 40—60, which becomes the median class. By using the median formula we get: No Xo, 445001443). 59 or or 10*27=720-20x 270 =720-20x 20x = 720 - 270 450 20 By substitution the value of x in the equation, 2.5. x+y=44 We get, 225+ y=dd y=44-22.5=215, Hence frequency for the class 20—40 is 22.5 and 60—80 is 21.5. Mode Mode is that value of the variable which occurs or repeats itself maximum number of times. The ‘mode is the most “fashionable” size in the sense that it is the most common and typical and is defined by Zizek as “the value occurring most frequently in series of items and around which the other items are distributed most densely.” In the words of Croxton and Cowden, the mode of a distribution is the value at the point where the items tend to be most heavily concentrated. According to A.M. Tuttle, Mode is the value which has the greater frequency density in its immediate neighbourhood. In the case of individual observations, the mode is that value which is repeated the maximum number of times in the series. The value of mode can be denoted by the alphabet z also. Example: Calculate mode from the follo StNumber : 1 2 Marks obtained: 10 27 Solution: No. of Students 1 1 1 I20 u 21 30 Mode is 27 marks 1 1 3 1 Calculation of Mode in Discrete series. In inspection. We can understand with the help of an example: discrete series, it is quite often determined by x x By inspection, the modal size is 3 as i 1 4 frequency is not fool proof as it is mot the frequency neighbour classes that decide the mode. In such cases, we shall be using the method ‘of Grouping and Analysis table. Size of shoe Frequency Solution: By inspection, the mode is 3, 1 4 2 3 5 B frequencies of size 5 are greater than the neighbouring frequencies is seen with the help of grouping and analysi Size of Shoe 4 Grouping t has the maximum frequency. But this test of greatest ‘of a single class, but also the frequencies of the 5 6 7 2 8 6 ‘but the size of mode may be 5. This is so because the neighbouring, frequencies of size 3. This effect of neighbouring is table technique. table eee When there exist two groups of frequencies in equal magnitude, then we should consider either both or omit both while analysing the sizes of items. Analysis Table Column Size of Items with Maximum Frequency 1 3 2 5,6 3 1,2,3,4)5 4 4,5,6 1385 5.6.7 6 3.4.5 Item 5 occurs maximum number of times, therefore, mode is 5. We can note that by inspection we had determined 3 to be the mode. Determination of mode in continuous series: In the continuous series, the determination of mode requires one additional step. Once the modal class is determined by inspection or with the help of grouping technique, then the following formula of interpolation is applied mraan Leslie foie Gate Modem, = — AFG wy iat W-h-F 1, = lower limit of the class, where mode lies. 1, = upper limit of the class, where mode lies. f,~ frequency of the class proceeding the modal class. Jf, = frequency of the class, where mode lies. f= frequency ofthe class succeeding the modal class Example: Calculate mode ofthe following frequency distribution: Variable Frequency 0-10 5 1020 10 20—30 15 30—40 4 40-50 10 50-60 5 60—70 3 Solution: Grouping Table x 1 2 e 4 s40-50 10 29 Is 50—60 5 18 8 60—70 3 Analysis Table Column Size of Item with Maximum Frequency 1 20-30 2 20—30, 30—40 3 1020, 20-30 4 0-10, 1020, 20-30 1020, 2030, 30—40 20—30, 30—40, 40—S0 Modal group is 20—30 because it has occurred 6 times. Applying the formula of interpolation. = 2045-10 (3920)=20+ 5(10)= 283 30-10-14 6 ill defined. The above formula is not applied where there are many modal values in a series or distribution. For instance there may be two or more than two items having the maximum frequency. In these cases, the series will be known as bimodal or multimodal series, ‘The mode is said to be ill-defined and in such cases the following formula is applied. Mode = 3 Median ~ 2 Mean. Example: Calculate mode of the following frequency data: Variate Value Frequency 10-20 $ 20-30 9 30—40 B 40-50 21 50-60 20 60—70 1s 70—80 8g 80—90 3 140Solution : First of all, ascertain the modal group withthe help of process of grouping Grouping Table x 3 Analysis Table Size of Item with Maximum Frequency 40—50 5060, 60—70 40-50, 50—60 40-50, 50—60, 60—70 20—30, 30—40, 40-50, 50—60, 60—70, 7080 30—40, 40—S0, 50—60 There are two groups which occur equal number of items. They are 40—50 and 50—60. ‘Therefore, we will apply the following formula Mode = 3 median ~ 2 mean and for this purpose the values of mean and median are required to be computed. Calculation of Mean and Median ao (m-45) Frequency Mid Values 740—s0 4s 0 0 48: Median is the N 50-60 20 3s +1 +20 68 value of th 6-1 Is 65 +2 +30 83. item which lies 70-80 8 75 +3 +24 91 in (40—S0) group 80-90 3 85 +4 +12 94 N=94 Bfd'= +40 N . ~he 2M, Med.nj, bend N f 40 47-27 200 =45 4+ 2019) =45 442-492 =404 10) = 40+ = = 49,5 oa a a Mode = 3 median - 2 mean = 3 (49.5) —2 (49.2) = 148.5 -98.4 = 50.1 Determination of mode by curve fitting: Mode can also be computed by curve fitting, The following steps are to be taken; () Draw a histogram of the data. Gi) Draw the lines diagonally inside the modal class rectangle, starting from each upper corner of the rectangle to the upper comer of the adjacent rectangle. Draw a perpendicular line from the intersection of the two diagonal lines to the X-axis. The abscissa of the point at which the perpendicular line meets is the value of the mode. Example: Construct a histogram for the following distribution and, determine the mode graphically x 0-10 10-20 20-30 30-40 40-50 if 5 8 15 R 7 Verify the result with the help of interpolation. Solution: (i ° 10 20-27-30 Mode 142Example: Calculate mode from the following data: Marks No. of Students Below 10 4 " 20 6 * 30 4 "a 46 * 7 " 60 86 ie % " 80 9 " 90 100 Solution: ‘Since we are given the cumulative frequency distribution of marks, first we shall convert it into the ‘normal frequency distribution: Marks Frequencies oH10 4 2 10-20 6-4=2 20-30 24-6=18 30—40 46-24-22 40-50 67-46=21 50-60 86-67=19 60—70 96-86 = 10 70—80 99-96 80-90 100-99 = It is evident from the table that the distribution irregular and maximum chances are tha: the distribution would be having more than one mode. You can verify by applying the grouping and analysing table. The formula to calculate the value of mode in cases of bio-modal distributions is Mode = 3 median ~2 mean, ‘Computation of Mean and Median:Marks Mid-value Frequency co) ® 0 og tds _ fils 0-10 s 4 ears Sa" 16 10-20 is 2 40 ot iB sons 20-30 2% 8 jas 36 30—40 35 2 M6 cnet -22 40-50 45 21 0 o 0 50-60 5s 9 8% 1 19 60-70 6 10 96 Bere) 70-80 8 3 9 ae 80-90 85 1 100 Ms oid 3f=100 Bde =-28 =28 19-422 00 Median = size of © th item = 12 = soth item. 2 2 Because 50 is smaller to 67in Cf column, Median class is 40-50 Nis 2% Median =, + xi Median = 40+. 50-46 19.2404 x10=41.9 2 21 Apply, Mode =3 median -2 mean 125.7- 84,3 = 413 Mode = 3 x 41.9~ 2x 42.2 Example: Median and mode of the wage distribution are known to be Rs, 33.5 and 34 respectively. Find the missing values, Wages (Rs.) No. of Workers 0-10 4 10-20 16 20-30 2 30—40 ° 40-50 2 5060 6 60—70Solution: We assume the missing frequencies as 20—30 as x, 30—40 as y, and 40—50 as 230 — (4+ 16 txty+6+4)=200-x-y: ‘We now proceed further to compute missing frequencies: Wages (Rs.) No. of workers Cumulative frequencies x Ch o—10 1020 20-30 30—40 40—30 5060 60—70 Apply, Median Fo) 15-(20+x) y ¥ 3.5 ~30)=(115-20-x)10 3.Sy=1150~200-10x 10x +3.5y=950 33.5=30+ (40-30) firh 5 hy, ene * 15-8 =20+—=—_ 30-20) 30-8-12 A 4Gy-200) = 10(y-x) 10x+2y = 800 Subtract equation (ii) from equation (i), 1 LS y= 150, y= 32100 Substitute the value of y = 100 in equation (i), we get 10x +3.5 (100) = 950 10x= 950-350 0. Third missing frequency = 200 — x—y=200~ 60-100 = 40. 145LESSON 3 MEASURES OF DISPERSION Why dispersion? Measures of central tendency, Mean, Median, Mode, et, indicate the central position of series. “They indicate the general magnitude ofthe data but fil to reveal all the peculiarities and characteristics of the series. In the other words, they fail to reveal the degree of the spread out or the extent of the variability in individual items of the distribution. This can be explained by certain other measures, known as “Measures of Dispersion’ or Variation, We can understand variation with the help of the following example : Series 1 Series II Series III 10 2 10 10 8 2 10 20 8 ; EX=30 30 30 Inall three series, the value of arithmetic mean is 10. On the basis of this average, we can say that the series are alike. If we carefully examine the composition of three series. we find the following differences: (In case of Ist series. the value are equal; but in 2nd and 3rd series, the values are unequal and do not follow any specific order. (i) The magnitude of deviation, item-wise, is different for the Ist, 2nd and 3rd series. But all these deviations cannot be ascertained if the value of” simple mean is taken into consideration. (ii) In these three series, itis quite possible that the value of arithmetic mean is 10; but the value of median may differ from each other. This can be understood as follows : I a a 10 2 8 10 Median 8 Median 10 Median 10 20 12 ‘The value of ‘Median’ in Ist series is 10, in 2nd series = 8 and in 3rd series = 10. Therefore, the value of the Mean and Median are not identical. (jv) Even though the average remains the same, the nature and extent of the distribution of the size of the items may vary. In other words, the structure of the frequency distributions may differ even though their means are identical. What is Dispersion? Simplest meaning that can be attached to the word ‘dispersion’ is a lack of uniformity in the sizes or {quantities of the items of a group or series. According to Reiglemen, “Dispersion is the extent to which the 146magnitudes or quantities of the items differ, the degree of diversity.” The word dispersion may also be used to indicate the spread of the data. In all these definitions, we can find the basic property of dispersion as a value that indicates the extent to which all other values are dispersed about the central value in a particular distribution. Properties of a good measure of Dispersion “There are certain pre-requisites for a good measure of dispersion: It should be simple to understand. It should be easy to compute It should be rigidly defined. It should be based on each individual item of the distribution. It should be capable of further algebraic treatment. It should have sampling stability 7. Itshould not be unduly affected by the extreme items. ‘Types of Dispersion “The measures of dispersion can be either ‘absolute’ or ‘relative’. Absolute measures of dispersion are expressed in the same units in which the original data are expressed. For example, if the series is expressed as Marks of the students in a particular subject; the absolute dispersion will provide the value in Marks. The only difficulty is that if two or more series are expressed in different units, the series cannot ‘be compared on the basis of dispersion, ‘Relative’ or ‘Coefficient’ of dispersion is the ratio or the percentage of a measure of absolute dispersion to an appropriate average. The basic advantage of this measure is that two or more series can be compared with each other despite the fact they are expressed in different uni ; ‘Theoretically, ‘Absolute measure’ of dispersion is better. But from a practical point of view, relative + or coefficient of dispersion is considered better as it is used to make comparison between series. Methods of Dispersion Methods of studying dispersion are divided into two types = () Mathematical Methods: We can study the ‘degree’ and ‘extent’ of variation by these ‘methods. In this category, commonly used measures of dispersion are (a) Range (b) Quartile Deviation (©) Average Deviation (@) Standard deviation and coefficient of variation Gi) Graphic Methods: Where we want to study only the extent of variation, whether itis higher or lesser a Lorenz-curve is used. Mathematical Methods (a) Range: It is the simplest method of studying dispersion. Rafge.is the difference between the smallest value and the largest value of a series. While computing range, we do not take into account frequencies of different groups. Formula: Absolute Range = L-S Coefficient of Range = +S ‘oefficient of Range = + 147where, L represents largest value in a distribution S represents smallest value in a distribution We can understand the computation of range with the help of examples of different series. (i) Raw Data: Marks out of 50 in a subject of 12 students, in a class are given as follows: 12, 18, 20, 12, 16, 14,30, 32, 28, 12, 12 and 35. In the example, the maximum or the highest marks obtained by a candidate is *35" and the lowest ‘marks obtained by a candidate is “12°. Therefore, we can calculate range; L=35 and S = 12 Absolute Range = L$ = 35-12 23 marks L-S_35-12_ 23 Coefficient of Range = L=S - 304 of Range = —8 - 39-12 - 2-049 approx. (ii) Discrete Series Marks of the Students in No. of students Accounts (out of $0) oo o Smallest 10 4 n 10 18 16 Largest. 20 1s Total = 45 ‘Absolute Range = 20~ 10= 10 marks 20-10 _10 Coefficient of Range = 10 4.34 approx. efficient of Range =20—10 10 -0.34 approx (iii) Continuous Series ie Frequencies 10—15 4 s=10 1s—20 10 L=30 20-25 % 25—30 8 Absolute Range = L- $= 30 10 = 20:marks ier TRsgnEe aclae ee et Oar L+S 35+12 40 Range is a simplest method of studying dispersion. It takes lesser time to compute the ‘absolute” and ‘relative’ range. Range does not take into account all the values of @ series, £. it considers only the extreme items and middle items are not given any importance. Therefore, Range cannot tell us anything about the character of the distribution. Range cannot be computed in the case of ‘open ends’ distribution i.e, distribution where the lower limit of the first group and upper limit of the higher group is not given. 148el ‘The concept of range is useful in the field of quality control and to study the variations in the prices of the shares etc. (b) Quartile Deviation (Q.D.) ‘The concept of ‘Quartile Deviation’ does take into account only the values of the “Upper quartile” (Q;) and the ‘Lower quartile” (Q,). Quartile Deviation is also called ‘inter-quartile range’. It is a better ‘method when we are interested in knowing the range within which certain proportion of the items fall. “Quartile Devi (i) Inter-quartile range = Q, - Q, (ii) Semi-quartile range = 2-9 ion’ can be obtained as Q- (i) Coeficient of Quartile Deviation = Og, Calculation of Inter-quartile Range, semi-quartile Range and Coefficient of Quartile Deviation in case of Raw Data Suppose the values of X are: 20, 12, 18, 25, 32, 10 In case of quartile-deviation, it is necessary to calculate the values of Q, and Q, by arranging the given data in ascending or descending order. ‘Therefore, the arranged data are (in ascending order): X= 10, 12, 18, 20, 25, 32 No. of items = 6 =the vatueot{ "item = ei 75th item \4 va) = the value of Ist item + 0.75 (value of 2nd item ~ value of Ist item) =10+0.75(12-10)=10+ 0.75 (2) =10+1.50=11.50 N+) 6+1) =e vate 324) item =3( S24 4 4 = the value of 3(7/4)th item = the valueof 5.2Sth item = the value of Sth item + 0.25 (the value of 6th item minus the value of Sth item) = 25 +0.25 (32-25) =25 + 0.25 (7) = 26.75 Therefore, () Inter-quartile range = Q, ~ Q, = 26.75 - 11.50= 15.25 2-2 (ii) Semi-quartile range = Gi) Coefficient of Quartile De = 0.39 approx.‘Suppose a series consists of the salaries (Rs.) and number of the workers in a Salaries (Rs.) 60 00 120 140 160 Calculation of Inter-quartile Range, semi-quartile Range and Coefficient of Quartile Deviation in discrete series No. of workers 4 20 21 16 9 In the problem, we will first compute the values of Q, and Q, Salaries (Rs.) No. of workers Cumulative frequencies «@ o (ef) 60 4 4 , 100 20 24— | lies in this cumulative 120 21 43 frequency M40 16 61 — Q\ ies in this cumulative 160 9 ot frequency E | _ Calculation of Q, : Calculation of Q, : 2 oot (¥*") th isom Ua) = sizeof (\m item =17.75th item 17.75 lies in the cumulative frequency 24, which is corresponding to the value Rs. 100 £ Q=Rs.100 Zo 2, = sie of (94) item +1) =sizeof (2 )m item =53.25th item 53.25 lies in the cumulative frequency 61 which is corresponding to Rs. 140 +. Qy=Rs.140 ( Inter-quartile range = Q,~ Q, = Rs. 140—Rs. 100 = Rs. 40 ( Semi-quartile range= > 2 Gil) Coefficient of Quartile Deviati 150 2-o (oe Jers 20 25-9, 140-100 _ 40 +2) AO <0.17 approx. 140+ 100 ~ 249 ~ 17 SPPFOXCalculation of Inter-quartile range, semi-quartile range and Coefficient of Quartile Deviation the case of continuous series We are given the following data Salaries (Rs.) No. of Workers to—20 20-30 30—40 40—50 In this example, the values of Q, and Q, are obtained as follows: Salaries (Rs.) No. of workers Cumulative frequencies @) p (cf) 10-20 20-30 x is used to find out Q, eo = 6.25. It lies in the cumulative frequency 10, which is corresponding to class 20—30. Therefore, O, group is 20—30. =20+ S254 .19=20+3.75=23.95 where, 4 =20, f=6, /=10, —=6.25, and cf, =4 3N a poeta Therefore, 28 pee B i875, which lies in the cumulative frequency 20, which is corresponding to class 30 — 40. Therefore Q, group is 30—40 where, [, =30, 1=10, 2M aig, fy=10, and f =10 2,304 875-19 ay.3828 151Therefore : (@ Inter-quartile range = Q, ~ Q, = Rs. 38.75 ~ Rs. 23.75 = Rs. 15.00 i) Semi-quartile range= Coefficient of Quartile Deviation = Qs +Q, RS.38.75+Rs.23.75 Advantages of Quartile Deviation Some of the important advantages are : (O_Itis easy to calculate. We are required simply to find the values of Q, and Q, and then apply the formula of absolute and coefficient of quartile deviation. (i) thas better results than range method. While calculating range, we take only the extreme values that make dispersion erratic. In the case of quartile deviation, we take into account middle 50% items, (Gil) The quartile deviation is not affected by the extreme items. Disadvantages (Its completely dependent on the central items. If these values are irregular and abnormal the result is bound to be affected. All the items of the frequency distribution are not given equal importance in finding the values of Q, and Q, (ii) Because it does not take into account alt the items of the series, considered to be inaccurate of dispersion, Similarly, sometimes we calculate percentile range, say, 90th and l0th percentile as it gives slightly better measure of dispersion, in certain cases. If we consider the calculations, then (@ Absolute percentile range = P,, ~ P,, Foo = Pro (i) Coefficient of percentile range =p p eo + Po This method of calculating dispersion can be applied generally in the case of open end series where the importance of extreme values are not considered. (©) Average Deviation Average deviation is defined as a value, which is obtained by taking the average of the deviations of ‘various items, from a measure of central tendency, Mean or Median or Mode, after ignoring negative signs. Generally, the measure of central-tendency, from which the deviations are taken, is specified in the problem. If nothing is mentioned regarding the measure of central tendency specified than deviations are taken from median because the sum of the deviations (after ignoring negative signs) is minimum Computation in case of raw data (Absolute Average Deviation about Mean or Median or Mode = Eg! where: N= Number of observations, |d| = deviations taken from Mean or Median or Mode ignoring signs. Average Deviation about Mean or Median or Mode i) Ce AD.= “ ®t Mean or Median or Mode 152Steps to Compute Average Deviation : (i) Calculate the value of Mean or Median or Mode (ii) Take deviations from the given measure of central-tendency and they are shown as d. (ii) Ignore the negative signs of the deviation that can be shown as jd| and add them to find 5d) (iv) Apply the formula to get Average Deviation about Mean or Median or Mode. Example: Suppose the values are 5, 5, 10, 15, 20. We want to calculate Average Deviation and Coefficient of Average Deviation about Mean or Median or Mode. Solution : Average Deviation about mean (Absolute and Coefficient) Deviation from mean Deviations after ignoring signs @ d Id] 5 -6 6 5 -6 6 10 +1 1 15 +4 4 20 +9 9 EX=55 E|d|=26 ‘Average Deviation about Mean = Be % =52 thie Sek nema oa A coe Neer ee ET Mean ul ‘Average Deviation (Absolute and Coefficient) about Median iz Deviation from median Deviations after ignoring d negative signs | d | 5 ai 5 s = s Median 10 ° 0 15 +5 5 20 +10 10 N=S Zl d|=25 ‘Average Deviation about Medi ae = 2 Coefficient of Average Deviation about median AD shout Mean, = < =05 153Average Deviation (Absolute and Coefficient) about Mode Deviation from mode d a 0 0 5 Average deviation about Mod: Coefficient of Average Deviation about Mode Average devi ‘Average Deviation about Mean or Median or Mode = where N= No. of items |d) = deviations from Mean or Median or Mode, after ignoring CCoefficent of ALD:about Mean or Median or Mode = “=D -sbout Mean or Mes Value of Mean or Median or Mode Example: Suppose we want to calculate coefficient of Average Deviation about Mean from the following descrete series: x Frequency 10 5 Is 10 20 1s 25 10 30. 5 Solution: First of all, we shall calculate the value of arithmetic Mean, Calculation of Arithmetic Mean SX 30 150 300 250 150 = pX= 900Calculation of Coefficient of Average Deviation about Mean Deviation from mean Deviations after ignoring negative signs | d | 10 Costficent of Average Deviation shout Mean = 4-D-Sbout mest Mean =|) _200 N45 in case we want to calculate coefficient of Average Deviation about Median from the following data Class Interval Frequency ‘Average Deviation about Mean 4.44 approx. 10-14 5 1s—19 20-24 2529 30—34 First ofall we shall calculate the value of Median but itis necessary to find the ‘eal limits’ of the siven class-intervals, This is possible by subtracting 0.5 from the lower-limits and added to the upper limits stthe given classes. Hence, the real limits shall be : 9.5—I4.5, 14.5—19.5, 19.5245, 24 5—29.5 and 295345 Calculation of M Class Interval Cumulative Frequency 95—14.5 5 145—19.5 18 19.5—24.5 30 4529.5 40 29.5345 3 45N 7h Median =/, + x lower limit of median group i= magnitude of median group f = frequency of median group Ch, = cumulative frequency of the group preceeding median group = size of median group Median size thitemie 4S =22.5 It les in the cumulative frequency 30, which is corresponding to class 19.5—24.5. Median group is 19.5—24.5 Median =1954 725215 =195+75.«5=195+25=195+25=22 Calculation of coefficient of Averagae Deviation about Median Class Frequency Mid points Deviation from Deviations after ignoring Intervals Zt x ‘median (22) negative signs |d| f\d| 95—145 s 12 -10 10 50 145—19.5 10 7 -5 5 30, 195245 15 2 0 0 0 24.5295 10 2 +5 5 50 29.5345 5 2 +10 10 50 N=45 Ef |d|= 200 A.D. about Median Median ane le N45 Coefficient of Average Deviation about Medii Advantages of Average D 1. Average deviation takes into account all the items of a series and hence, it provides sufficiently representative results It simplifies calculations since all signs of the deviations are taken as positive. Average Deviation may be calculated either by taking deviations from Mean or Median or Mode. |. Average Deviation is not affected by extreme items. 1565. Itis easy to calculate and understand, 6. Average deviation is used to make healthy comparisons. ns Disadvantages of Average Devi 1. Itis illogical and mathematically unsound to assume all negative signs as positive signs. Because the method is not mathematically sound, the results obtained by this method are not reliable. 3. This method is unsuitable for making comparisons either of the series or structure ofthe series. ‘This method is more effective during the reports presented to the general public or to groups who are not familiar with statistical methods. (@) Standard Deviation The standard deviation, which is shown by greek letter o (read as sigma) is extremely useful in judging the representativeness of the mean. The concept of standard deviation, which was introduced by Karl Pearson, has a practical significance because it is free from all defects, which exists in a range, tion or average deviation. quartile de Standard deviation is calculated as the square root of average of squared deviations taken from ‘actual mean It is also called root mean square deviation. The square of standard deviation i.e. a is called ‘variance’ jon in case of raw data There are four ways of calculating standard deviation for raw data: (When actual values are considered; (ii) When deviations are taken from actual mean; (ii) When deviations are taken from assumed mean; and (iv) When ‘step deviations’ are taken from assumed mean, (@ When the actual values are considered: where, N= Number of the items, Ex or == —- (XP ae? ven values in the series, X= Arithmetic mean of the values We can also write the formula as follows fue VN Steps to calculate & o (})_ Compute simple mean of the given values. (i) Square the given values and aggregate them (ii) Apply the formula to find the value of standard deviation. Example: Suppose the values are given 2,4, 6, 8, 10. We want to apply the formula 157Solution: We are required to calculate the values of WV, ¥, 5X7. They are calculated as follows i) When the deviations are taken from actual mean ee where, N = no. of items and x = ( - X) Steps to Calculate o (i) Compute the deviations of given values from actual mean i.e., (X — 2) and represent them byx (id) Square these deviations and aggegate them Gil) Use the formula, ¢ = ext Vw Example. We are given values as 2, 4, 6, 8, 10. We want to find out standard deviation, (X-X)=x ( 30 N 7 fap Bx. 40 _ e-2828 w YS: (ii) When the deviations are taken from assumed meanwhere, N=no. of items, x = deviations from assumed mean i-e., (X —A). ‘A = assumed mean Steps to Calculate : (We consider any value as assumed mean. The value may be given in the series or may not be given in the series. (ii) We take deviations from the assumed value i.e., (X — A), to obtain dx for the series and aggregate them to find Edx. (il) We square these deviations to obtain dx? and aggregate them to find Edx". (iv) Apply the formula given above to find standard deviation. Example. Suppose the values are given as 2, 4, 6, 8 and 10. We can obtain the standard deviation as: x dx = (X-A) assumed mean (A) 2 (4) tH) x! where, i= Common factor, N = Number of items, dx (Step-deviations) Steps to Calculate o : (We consider any value as assumed mean from the given values or from outside. We take deviation from the assumed mean ie., (X ~ A), We divide the deviations obtained in step (ii) with a common factor to find step deviations X-A (=) and represent them as dx and aggregate them to obtain Dax. (iv) We square the step deviations to obtain dx? and aggregate them to find dv’. Example: We continue with the same example to understand the computation of Standard Deviation. a d=(-4 de (2)anai-2 2 0 2 4 +6(§) x2evotxzevax2 414x2=2.828 Note: We can notice an important point that the standard deviation value is identical by four methods, Therefore any of the four formulae can be applied to find the value of standard deviation. But the suitability of a formula depends on the magnitude of items in a question. Coefficient of Standard-deviation = en example, ¢ = 2828and x ‘Therefore, coefficient of standard deviation = & =228 9,471 Coefficient of Variation or C. V. yf ° 2.828 =Sx100 x 100=47.1% ¥ 6 Generally, coefficient of variation is used to compare two or more series. If coefficient of variation (C.V) is more for one series as compared to the other, there will be more variations in that series, lesser stability or consistency in its composition. If coefficient of variation is lesser as compared to other series, it will be more stable, or consistent. Moreover, that series is always better where coefficient of variation or coefficient of standard deviation is lesser. Example. Suppose we want to compare two firms where the salaries of the employees are given as follows: Firm A Firm B No. of workers 100 100 ‘Mean salary (Rs.) 100 80 Standard-deviation (Rs.) 40 45 Solution: We can compare these firms either with the help of coefficient of standard dev coefficient of variation. If we use coefficient of variation, then we shall apply the formula : Firm B 40 45 CV.==2x100=40% — C.V.=—x100=56.25% 100 80 X =100,0=40. X =80,0=45, Because the coefficient of variation is lesser for firm A as compared to firm B, therefore, firm A is better. Calculation of standard-deviation in discrete and continuous series We use the same formula for calculating standard deviation for a discrete series and a continuous series. The only difference is that in a discrete series, values and frequencies are given whereas in a ‘continuous series, class-intervals and frequencies are given. When the mid-points of these class-intervals are obtained, a continuous series takes shape of a discrete series. X denotes values in a discrete series and rid points in a continuous series. 160‘When the deviations are taken from actual mean We use the same formula for calculating standard deviation for a continuous series a fx N ‘Number of items Frequencies corresponding to different values or class-intervals. Deviations from actual mean (X ~X) X= Values in a discrete series and mid-points in a continuous series. Step to calculate o (Compute the arithmetic mean by applying the required formula. Take deviations from the arithmetic mean and represent these deviations by x. Square the deviations to obtain values of x Multiply the frequencies of different class-intervals with 2° to find fi. Aggregate fx* column + toobtain Efe? (v) Apply the formula to obtain the value of standard deviation. ft N If we want to calculate variance then we can compute o? Example : We can understand the procedure by taking an example Class Intervals Frequency (f) Midpoints (m) 12 7 2 a 2 where, N=45, E fm=990 n of Standard Deviation Class Mid Deviations from Imervals points actual median = 22 x x (X-22) lo—14 2 10 1s—19 ” -5 20-24 2 0 2s—29 2 +5 30-34 2 +10Efe > o=\~2~ where, N=45, Ef? =1500 Ss were, N=45, Efe? =1504 o= | = 33.33 =5.77 approx. ‘When the deviations are taken from assumed mean In some cases, the value of simple mean may be in fractions, then it becomes time consuming to take deviations and square them. Alternatively, we can take deviations from the assumed mean, where N = Number of the items, dx = deviations from assumed mean (X ~A), [f= frequencies of the different groups, = assumed mean and X= values or mid points. . Steps to calculate 6 (@ Take the assumed mean from the given values or mid points. (ii) Take deviations from the assumed mean and represent them by dx. (Gi) Square the deviations to get de’ (iv) Multiply fwith dx of different groups to obtain fax and add them up to get 2. (v). Multiply f with de? of different groups to obtain fax’ and add them up to get Bf. (vi) Apply the formula to get the value of standard deviation. Example : We can understand the procedure with the help of an example Class Frequency Mid Deviations from Intervals points ‘assumed Mean iz . de (X-17) 5 12 <5 10 a7 0 15 2 +5 10 2 +10 5 32 +15 N=453 o= ae Ee where, N=45, © far? =1500, © te =225 2 vin ae (2) = ¥58.33— 25 = 33.33 = 5.77 approx. “SRV as as When the step deviations are taken from the assumed mean ee) ~ o= N N where N = Number of the items (Ef). common factor, {J = frequencies corresponding to different groups, x-A) dx = step-deviations ( 7} te o Take deviations from the assumed mean of the calculated mid-points and divide all deviations by a common factor (i)and represent these values by dx ‘Square these step deviations ¢xto obtain dx for different groups Multiply f with dx of different groups to find etx and add them to obtain Efetx (iv) Multiply f with qx? of different groups to find fx*for different groups and add them to obtain Lf? (¥) Apply the formula to get standard deviation. Example : Suppose we are given the series and we want to calculate standard deviation withthe help of step deviation method. According to the given formula, we are required to calculate the value of i, N,Bfeeeand Byeds? Class ‘Frequency Mid —_ Deviations from Intervals point assumed mean (22) ( Vz iz x fds 5 2 -10 =10 10 7 -5 -10 1S 2 +0 0 10 27 +5 10 2 10 Lyte =0 where, N= 45, , fe =0, fib? [33 x$ =1.154%5 =5.77 approx.Advantages of Standard Deviation © ‘Standard deviation is the best measure of dispersion because it takes into account all the items and is capable of future algebric treatment and statistical analysis. Gi) Itis possible to calculate standard deviation for two or more series. Gi) This measure is most suitable for making comarisons among two or more series about varibility Disadvantages (tis difficutt to compute. ' (i) Teassigns more weights to extreme items and less weights to items that are nearer to mean. {tis because of this fact that the squares of the deviations which are large in size would be Proportionately greater than the squares of those deviations which are comparatively smal Mathematical properties of standard deviation (co) () If deviations of given items are taken from arithmetic mean and squared then the sum of Squared deviation should be minimum, ie. (x —7) = Minimum ) If different values are increased or decteased by a constant, the standard deviation will remain the same. Whereas if different values are multiplied or divided by a constant than the standard deviation will be multiplied or divided by that constant. (Gi) “Combined standard deviation can be obtained for two or more series with below given formula: Tepresents number of items in first series, 'N, represents number of items in second series, ©} represents variance of first series, Fepresents variance of second series, represents the difference between ¥,, — ¥, represents the difference between X,,—¥, represents arithmetic mean of first series, represents arithmetic mean of second series, Xz. Tepresents combined arithmetic mean of both the series ind the combined stnadard deviation of two series, from the below given information First Series Second Series No. of items 10 15 Arithmetic means Is 20 Standard deviation 4 5 Solution : Since we are considering two series. therefore combined standard deviation is computed by the following formula Ine |:=20, o,=4, 0,25 M+ x10)+(20%15) _ 1504300 450 _ jg 10+15 as 25 ¥,)=18-15 = Sand d, =(¥,, ~¥)+18-20=-2 By applying the formula of combirted standard deviation, we get ieee 10(4)? + 15(5)? + 1008-15)? +15(18~20)" Bay T+ sa (fi0x16) +(15x25)+ 0x9) 054) V 25 jamiean |S spa =a upon (iv) Standard deviation of n natural numbers can be computed as : 1 = 5(N- 1) N represents numbers number of items. () For a symmetrical distribution Ktocovers 68.27%of items, X20 covers 95.45% of items, X+3o covers 99.73% of items, — oes X420 X+36 X+o ning department in a State affected by food shortage. Local Example : You are heading a ratios investigators submit the following report lable per adult during current period : Daily calorie value of food av Standard deviation Area Mean A 2,500 400 B 2,000 200 165‘The estimated requirement of an adult is taken at 2,800 calories daily and the absolute minimum is 1,350. Comment on the reported figures, and determine which area, in your opinion, need more urgent attenti Solution : We know that X +o covers 68.27% of items, ¥ +20 covers 95.45% of items, ¥ +3 covers 99.73%. In the given problem if we take into consideration 99.73%. i... almost the whole population, the imits would be X +30-- For Area A these limits are 2,500 + (3x 400) = 3,700 500 —(3x 400) = 1,300 For Area B these limits are : X +30 =2,000 + (3x 200) = 2,600 X 30 = 2,000 (3200) = 1,400 It is clear from above limits that in Area A there are some persons who are getting 1300 calories, i.e. below the minimum which is 1,350, But in case of area B there is no one who is getting less than the minimum, Hence area A needs more urgent attention. (vi)_ Relationship between quartile deviation, average deviation and standard deviation is given as: Quartile deviation = 2/3 Standard deviation ‘Average deviation = 4/5 Standard deviation (vii) We can also compute corrected standard deviation by using the following formula = (correct X)? Corrected 2X Corrects (@) Compute corrected ¥ where, corrected EX = EX + correct items ~ wrong items where, EX=N-X (b) Compute corrected EX? = EX? + (Each correct item) ~(Each wrong item)? where, EX? = No* + NX? Example : Find out the coefficient of variation of a series for which the following results are given : N 0, EX"=25, EX"? =500 where: X= der from the assumed average 5. (b) Fora frequency distribution of marks in statistics of 100 candidates, (grouped in class inervals of ‘0—10, 10—20) the mean and standard deviation, were found to be 45 and 20. Later it was discovered that the score 54 was misread as 64 in obtaining frequency distribution. Find out the correct mean and correct standard deviation of the frequency destribution. (©) Can coefficient of variation be greater than 100%? If so, when? o Solution : (a) We want to calculate, coefficient of variation, which is «100 ‘Therefore, we are required to calculate mean and standard deviation. 166Calculation of simple mean A=5, N=50, EX'=25 Fa5+35=55 Calculation of standard deviation f(r) -fe-@) Calculation of Coefficient of variation 5-025 = 4.75 =2.179 179 199 2 217.9 126.5 b 39.6% (b) Given =100, wrong value = 64, correct value = $4 Since this is a case of continuous series, therefore, we will apply the formula for mean and standard >> —— = == = 0.324 approx. Example : Calculate standard deviation from the following data Class Interval frequency -30 10-20 5 -20 10-10 10 1000, Is 010 10 10 10t0 20 5 N Solution: Calculation of Standard Deviation Class Frequency Mid Deviations from Step Derivations Imervals poinis assumed Mean (A =-5) when i = 10 x dee ee dt féx 68 -10 -10 30 to-20 20 4 200-10 10 1 10100 5 +0 0 0 01010 1 10 101020 4 10 Yfke =0 Side? = 600, Sfx =0, Lfdx? = 60 where,N =45, i f a o-te (3) 10= | 10= 135 x10=1 153 Example : For two firms A and B belonging to same industry, the following details are available Firm A Firm B Number of Employees 100 200 ‘Average wage per month Rs. 240 Rs. 170 Standard deviation of the wage per month Rs. 6 Rs. 8 Find (i) Which firm pays out larger amount as monthly wages? (ii) Which firm shows greater variability in the distribution of wages? (iii) Find average monthly wages and the standard deviation of wages of all employees for both the firms. Solution : (i) For finding out which firm pays larger amount, we have to find out EX. or x Firm A: N =100, X = 240 EX =,00x240 = 24000 = 200, X=170 EX =200%170=34000 Firm B Hence firm B pays larger amount as monthly wages. (i) For finding out which firm shows greater variability in the distribution of wages, we have to calculate coefficient of variation. Firm A: CV.=-<-x100=—5 %100=2.50 5 abhi FirmB: C.V.=-2x100=—5 x100=4.71 xT Since coefficient of variation is greater for firm B, hence it shows greater variability inthe distribution of wages MX+Mk, N+ Ny (iii) Combined wages : X,) where, N,=100, X,=240, N,=200, ¥,=170 (100240) + (200x170) _ 24000 +34000 _ 195 53 Hence X,, 100 + 200 300 172Combined Standard Deviation : oy =, [Matt Mio} + Nid? + Nad} ny caine, | 200, o,=6, 0, =8 d,=(X,-X,,)=240-193.3=46.7 ¥, - ¥,,)=170-193.3 =-23.3 {REEDS (200)(-23.3)? 100+ 200 3600-+12800-+ 218089+108578 _ [451643 _ 5 5 300 300 fe Example : From the following frequency distribution of heights of 360 boys in the age-group 10-20 years, calculate the (arithmetic mean; (ii) coefficient of variation; and (ii) quartile devis Height (cms) No. of boys Height (cms) No. of boys 126-130 31 146—150 0 131135 4 151155 ss 136—140 48 156160 B 141—145 31 161165 28 Calculation of X , Q.D., and C.V. Heights mp. (%-143/5 a 7 dx fax fas? of 126—130 128 31 3 3 29 31 131-135 133 4 2 88 176 15 136—140 138 48 ‘l 48 4B 123 141—145 143 SI 0 0 0 m4 146—150 148 0 41 +60 0 234 151-155 133 35 2 +10 20 289 156—160 158 B 8 +129 387 332 161165 163 28 4 +2 48 360 N=45 fide = 182 Yfde? = 1618 173@ Fads Ens where, N=360, 4=143, i=5, Zfde=182 F=1434 51434253 360 45.53. cy CV= 2 x100 = Ee (Efe ists (es yw N 360 \ 360, = ¥4,494 — 0.506 x5 = 2.00x5=10 10 v.=— 5100-687; 145.53 He rogoont ap=2 Q, =Size of “th observation = *8° = 90¢h observation Q lies inthe class 136~140, But the real limits of this class is 135.5 140.5 ah ens = 135547555 2 13554156 2137.06 7 #8 = Size of th observation =3x 260. 270 observation, Q5 ies in the class 1$1—155. But the real limit ofthis class is 150.5 155.5 4+ he; = 155+ 202445 = 19054327 = 153.7 f gp =228 . 1537 37.06 = 8.395 174UNIT - IL LESSON | CORRELATION In the earlier chapters we have discussed univariate distributions to highlight the important characteristics by different statistical techniques. Univariate distribution means the study related to one variable only. We may however come across certain series where each item of the series may assume the values of two or more variables. The distributions in which each unit of series assumes two values is called bivariate distribution. In a bivariate distribution, we are interested to find out whether there is any relationship between two variables. The correlation is a statistical technique which studies the relationship between two or more variables and correlation analysis involves various methods and techniques used for studying and measuring the extent of relationship between the two variables. When two variables are related in such a way that a change in the value of one is accompanied either by a direct change or by an inverse change in the values of the other, the two variables are said to be correlated. In the correlated variables an increase in one variable is accompanied by an increase or decrease in the other variable. For instance, relationship exists between the price and demand of a commodity because keeping other things equal, an increase in the price of a commodity shall cause a decrease in the demand for that commodity. Relationship might exist between the heights and weights of the students and between amount of rainfall in a city and the sales of raincoats in that city These are some of the important definitions about correlation. Croxton and Cowden says, "When the relationship is of a quantitative nature, the appropriate statistical too! for discovering and measuring the relationship and expressing it in a brief formula is known as correlation’. AM, Tuttle says, “Correlation is an analysis of the covariation between two or more variables.” WA. Neiswanger says, "Correlation analysis contributes to the understanding of economic behaviour, aids in locating the critically important variables on which others depend, may reveal to the economist the connections by which disturbances spread and suggest to him the paths through which stabilizing forces may become effective. LR. Conner says, "If two or more quantities vary in sympathy so that the movements in one tends to be accompanied by corresponding movements in others than they are said be correlated. Utility of Correlation ‘The study of correlation is very useful in practical life as revealed by these points. 1, With the help of correlation analysis, we can measure in one figure, the degree of relationship ‘existing between variables like price, demand, supply, income, expenditure etc. Once we know that two es are correlated then we can easily estimate the value of one variable, given the value of other. 2. Correlation analysis is of great use to economists and businessmen, it reveals to the economists the disturbing factors and suggest to him the stabilizing forces. In business, it enables the executive to estimate costs, sales etc. and plan accordingly 3. Correlation analysis is helpful to scientists. Nature has been found to be a multiplicit related forces. Difference between Correlation and Causation The term correlation should not be misunderstood as causation. If correlation exists between two variables, it must not be assumed that a change in one variable is the cause of a change in other variable. In simple words, a change in one variable may be associated with a change in another variable but this change need not necessarily be the cause of a change in the other variable. When there is no cause and effect relationship between two variables but a correlation is found between the two variables such correlation is known as “spurious correlation” or “nonsense correlation”. Correlation may exist due to the following: 1. Pure change correlation: This happens in a small sample, Correlation may exist between incomes and weights of four persons although there may be no cause and effect relationship between 175 of inter-incomes and weights of people. This type of correlation may arise due to pure random sampling variation ‘or because of the bias of investigator in selecting the sample. 2. When the correlated variables.are influenced by one or more variables. A high degree of correlation between the variables may exist, where the same cause is affecting each variable or different cause affecting each with the same effect. For instance, a degree of correlation may be found between yield per acre of rice and tea fa |g [a ea BrlaRe of go SiAidibent el a ele te he ibe = 20! 20] | 24 | 2 |Z =92 20] 28] 0 | 22 | 1g |Detndy| = | 2 fite.E fay _ 2 fialy = 2 _ fey \f a (Ehby fits? OPEV Ny gy2 _& fy fae ee fee ee J ag (8)(-34) 9072 . TT fig ata a1 err — Cy] [ise 1a. +142 os | Vi00 * 100 Properties of Coefficient of Correlation Following are some of the important properties of - (1) The coefficient of correlation lies between —I and +1 (-1 srs+l) @) The coefficient of correlation is independent of change of scale and origin of the variable X and Y. 184G) The coefficient of correlation is the geometric mean of two regression coefficients. ces oaa Merits of Pearson's coefficient of correlation : The correlation of coefficient summarizes in one figure the degree and direction of correlation. Value varies between +1 and —1 Demerits of Pearson's coefficient of correlation : It always assumes linear relationship between the variables; in fact the assumption may be wrong. Secondly, itis not easy to interpret the significance of correlation coefficient. The method is time consuming and affected by the extreme items.LESSON 2 REGRESSION ANALYSIS ‘The statistical technique correlation establshes the degree and direction of relationship between two or ‘more variables. But we may be interested in estimating the value of an unknown variable on the basis of a known variable. If we know the index of money supply and price-level, we can find out the degree and direction of relationship between these indices with the help of correlation technique. But the regression technique helps us in determining the general price-level for a given supply of money. Similarly if we know that the price and demand of a commodity are correlated we can find out the demand for that commodity for a fixed price. Hence, the statistical tool with the help of which we can estimate or predict the unknown variable from known variable is called regression, The meaning of the term “Regression” is the act of retuming or going back. This term was first used by Sir Francis Galton in 1877 when he studied the relationship between the height of fathers and sons. His study revealed a very interesting relationship. All tall fathers tend to have tall sons and all short fathers short sons but the average height of the sons of a group of tall fathers was less than that of the fathers and the average height of the sons of a group of short fathers was greater than that of the fathers. The line describing this tendency of going back is called “Regression Line”. Modem writers have started to use the term estimating line instead of regression line because the expression estimating line is more clear in character. According to Morris Myers Blair, regression is the measure of the average relationship between two or more ariables in terms of the original units of the data Regression analysis is a branch of statistical theory which is widely used in all the scientific disciplines. It is a basic technique for measuring or estimating the relationship among economic variables that constitute the essence of economic theory and economic life. The uses of regression analysis are not confined to economics and business activities. Its applications are extended to almost all the natural, physical and social sciences. The regression technique can be extended to three or more variables but we shall limit ourselves to problems having two variables in this lesson, Some of the uses of the regression analysis are given below: (Regression Analysis helps in establishing a functional relationship between two or more vari- ables. Once this is established it can be used for various analytic purposes. G_With the use of electronic machines and computers, the medium of calculation of regression equation particularly expressing multiple and non-linear relations has been reduced considerably. Gi) Since most of the problems of economic analysis are based on cause and effect relationship, the regression analysis is « highly valuable tool in economic and business research, (iv) The regression analysis is very useful for prediction purposes. Once a functional relationship is established the value of the dependent variable can be estimated from the given value of the independent variables. Difference between Correlation and Regression Both the techniques are directed towards a common purpose of establishing the degree and direction of relationship between two or more variables but the methods of doing so are different. The choice of one or the other will depend on the purpose. If the purpose is to know the degree and direction of relationship, correlation is an appropriate too! but if the purpose is to estimate a dependent variable with the substitution of one or more independent variables, the regression analysis shall be more helpful. The points of difference are discussed below: (Degree and Nature of Relationship : The correlation coefficient is a measure of degree of covariabilty between two variables whereas regression analysis is used to study the nature of relationship between the variables so that we can predict the value of one on the basis of another. The reliance on the estimates or predictions depend upon the closeness of relationship between the variables. 186(i) Cause and Effect Relationship: The cause and effect relationship is explained by regression analysis. Correlation is only a tool to ascertain the degree of relationship between two variables and ‘we can not say that one variable is the cause and other the effect, A high degree of correlation between price and demand for a commodity or ata particular point of time may not suggest which is the cause and which is the effect. However, in regression analysis cause and effect relationship is clearly expressed, one variable is taken as dependent and the other an independent, ‘The variable which is the basis of prediction is called independent variable and the variable that is to be predicted is called dependent variable, The independent variable is represented by X and the dependent variable by Y. Principle of Least Squares Regression refers to an average of relationship between a dependent variable with one or more independent variables. Such relationship is generally expressed by a line of regression drawn by the method of the “Least Squares”. This line of regression can be drawn graphically or derived algebraically with the help of regression equations. The condition usually stipulated in regression analysis is that the sum of the squares of the deviations of the observed y values from the fitted line shall be minimum. This is known as the least squares or minimum squared error criterion. A line fitted by the method of least squares is the line of best fit. The line satisfies the following conditions (i) The algebraic sum of deviations above the line and below the fine are equal to zero. Lx-x) =O and Z(y-y) =0 Where x, and y, are the values derived with the help of regression technique ‘The sum of the squares of all these deviations is less than the sum of the squares of deviations from any other line, we can say & (e~x,) is smaller than ¥ (x ~ Ay? and = @—y.F is smaller than ¥ (y ~ AY Where A is some other value or any other straight line ‘The line of regression (best fit) intersect at the mean value of the variables i.e., x and y (iv) When the data represent a sample from a larger population, the least square line is the best estimate of the population line, Methods of Regression Analysis We can study regression by the following methods 1. Graphic method (regression lines) 2. Algebraic method (regression equations) We shall discuss these methods in detail 1. Graphic Method: When we apply this method different points are plotted on a graph paper representing different pairs of variables. These points give a picture of a seatter diagram with several points spread over. A regression line may be drawn between these points either by free hand or by a scale in such a way that the squares of the vertical or horizontal distances between the points and the line of regression is minimum. It should be drawn in such a manner that the line leaves equal number of points on both sides. However, to ensure this is rather difficult and the method only renders a rough estimate which can not be completely free from subjectivity of person tro 76 vg Rhw pepe eerie secharsc lS gic? Sales 121241317 132 9H 1D, 1386 78S Calculations of Regression Equations Purchases (X76) Sales (Y~120) x dx xt Y ay ay? xy ° a “4 196 12 -8 “a 12 n 4 16 124 4 16 -16 98 +2 484 BI + 121 4282 16 0 0 7 3 9 0 81 45 28 132 +12 144 +60 56 -20 400 96 24 576 +480 16 0 0 120 0 0 0 2 +16 256 136 +16 256 4256 88 +12 144 ” 23 529 216 49 27 n9 85 35 1225 +945 Bdx=-10 Edx? =2250 Edy =—50 Edy? = 2940 Edxdy = 1803 195gat gi Secon ah sy N 10 Regression Cefficients : X on Y (Edx)x(Zdy) (-10)x(-50) 1803 ta - 10 say? ey 04) N 10 Yon Sdxdy -EBIEEM) yy95_ 10) (-80) ie byx = = 1 50.78 Edy 2240 Regression equation : X on Y X-X=bxy(¥-F) Substituting the values X= 75 = 0.652 (Y- 115) = 0.652Y - 74.98 or X=0.652Y + 0.02 when x= 100 Y= 0.78 100+ 56.5 = 134.5 Regression equation : Y on X Y-¥=.. (X-X) Y= 115 = 0.78 (X ~ 75)= 0.78 X - 58.5 Y=0.78X +565 196UNIT - TL LESSON INDEX NUMBERS Economic activities have constant tendency to change. Prices of commodities which are the total result of number of economic activities also have a tendency to fluctuate. The problem of change in prices is very important. But itis not very simple to study this problem and derive conclusions because price of different commodities change by different degrees. Hence, there is a great need for a device which can smoothen the iregularities in the prices to obtain a conclusion. This need is satisfied by Index Numbers which makes use of percentages and average for achieving the desired objective. Index Number is a device for ‘comparing the general level of the magnitude of a group of distinct but related variables in two or more Situations. Index Numbers are used to feel the pulse of the economy and they reveal the inflationary or ‘deflationary tendencies. In reality, Index Numbers are described as barometers of economic activity because fone wants to have an idea as to what is happening in an economy, he should check the important indicates like the index numbers of industrial production, agricultural production, business activity etc. ‘The various definitions of Index Numbers are discussed under three heads: (@_ Measure of change i) Device to measure change (ii) A series representing the process of change. ‘According to Maslow, it is a numerical value characterising the change in complex economic phenomenon over a period of time. Spiegal explains an index number is a statistical measure designed to show changes in variable or 8 group of related variables with respect to time, geographical location or other characteristics. Gregory and Ward describes it as a measure over time designed to show average change in the price, quantity or value of a group of items. Croxton and Cowden says Index numbers are devices for measuring differences in the magnitude of a group of related variables. BLL. Bowley describes Index Numbers as a series which reflects in its trend and fluctuations the movements of some quantity to which itis related. Blair puts Index Numbers are specialised kinds of an average. Index Numbers have the following features : () Index numbers are specialised averages which are capable of being expressed in percentage (ii) Index numbers measure the changes in the level of a given phenomenon. (ii) Index numbers measure the effect of changes over a period of time Index Numbers are indispensable tools of economic and business analysis. Their significance can be appreciated by following points Index number helps in measuring relative changes in a set of items. ~ Index numbers provide a good basis of comparison because they are expressed in abstract unit distinet from the unit of element. Index numbers help in framing suitable policies for business and economic activities. 4. Index numbers help in measuring the general trend of the phenomenon. Index numbers are used in deflating. They are used to adjust the original data for price changes or to adjust wages for cost of living changes. 197. The utility of index numbers has increased a great deal because of the method of splicing whereby the index prepared on any base can be adjusted with reference to any other base. ‘As a measure of average change in a group of elements the index numbers can be used for forecasting future events. Whereas a trend line gives an average rate of change in a single phenomenon, it indicates the trend for a group of commodities. It is helpful in a study of comparative purchasing power of money in different countries of the world. Index numbers of business activities throw light on the economic progress made by various countries, Problems in the Construction of Index Numbers While constructing Index Number, the following problems arise 1. The purpose of Index: Before constructing an Index Number, it is necessary to define precisely the purpose for which they are to be constructed. A single Index can not fulfil all the purposes. Index Numbers are specialised tools which are more efficient and useful when properly used. If the purpose is not clear, the data used may be unsuitable and the indices obtained may be misleading. If itis desired to construct a Cost of Living Index of labour clas, then only those item will be included which are required by the labour class. 2. Selection of the items: The list of commodities included in the Index numbers is called the ‘Regimen’. Because it may not be possible to include all the items, it becomes necessary to decide what items are to be included. Only those items should be selected which are representative of the data, e.g. in 4 consumer Price Index for working class, items like scooters, cars, refrigerators, cosmetics, ete, find no place. There is no hard and fast rule regarding the inclusion of number of commodities while constructing Index Numbers. The number of commodities should be such as to permit the influence of the inertia of large numbers. At the same time the numbers should not be so large as to make the work of computation uneconomical and even difficult. The number of commodities should therefore be reasonable. The following points should be considered while selecting the items to be included in the Index : (The items should be representative. Gi). The items should be of a standard quality. Non-tangible items should be excluded (iv). The items should be reasonable in number, 3. Price Quotations: It is neitixr possible nor necessary to collect prices of the commodities from all markets in the country where it is dealt with, we should take a sample of the markets. Selection must be made of the representative places and persons. These places should be well known for trading these commodities. It is necessary to select a reliable agency from where price quotations are obtained. 4, Selection of the Base period: In the construction of Index Numbers, the selection of the base period is very important step since the base period serves as a reference period and the prices for a given period are expressed as percentages of those for the base year, it is therefore necessary that (the base period should be normal and (ii)_it should not be too far in the past. There are two methods by which base period can be selected (i) Fixed base method and (ii) Chain base method. Fixed base Method: According to this any year is taken as a base. Prices during the year are taken equal to 100 and the prices of other years are shown as percentages of those prices of the base year. Thus indices for 1998, 99,2000, and 2001 are calculated with 1997 as base year, such indices will be called as fixed base indices. 198Chain base Method: According to this method, relatives of each year are calculated on the basis of the prices of the preceding year. The Chain base Index Numbers are called as Link Relatives eg., if index numbers are constructed for 1997, 98, 99, 2000 and 2001 then for 1998, 1997 will be the base and for 1999, 1998, will be the base and so on. 5. The choice of an average: An Index number is a technique of ‘averaging’ all the changes in the ‘group of series over a period of time, the main problem is to select an average which may be able to ‘summaries the change in the component series adequately. Median, Mode and Harmonic Mean are never used in the construction of index numbers. A choice has to be made between the Arithmetic Mean and the Geometric Mean. Merits and demerits of the two are then to be compared. Theoretically A.M. is superior to the A.M. in many respects but due to difficulty in its computation, it is not widely used for this purpose. 6. Selection of appropriate weights: The term weight refers to the relative importance of the different items in the construction of index numbers. All items are not of equal importance and hence it necessary to find out some suitable methods by which the varying importance of the different items taken into account. The system of weighting depends upon the purpose of index numbers, but they ought to reflect the relative importance of the commodities in the regimen. The system may be either arbitrary or onal. The weightage may be according to: (1) the value of quantity produced, or 2) the value of quantity consumed, or (3). the value or quantity sold or put to sale. There are two methods of assigning weights. (@_ Implicitand i) Explicit Implicit: Under this method, the commodity to which greater importance has to be given is repeated a number of times ie. a number of varieties of such commodities are included in the index numbers as separate items. Explicit: In this case, the weights are explicitly assigned to commodities. Only one kind of a commodity is included in the construction of Index Numbers but its price relative is multiplied by the figure of weights assigned to it. There has to be some logic in assigning such type of weights. Methods of Constructing Index Numbers ‘The index number for this purpose is divided into two heads (1) Unweighted Indices: and (2) Weighted Indices. Each one of these is further sub-divided under two categories (i) Simple aggregative ; and (ii) Average of price relatives. Unweighted Index Numbers (i) Simple aggregative method: Under this method the total of the current year prices for various ‘commodities is divided by the total of the base year prices and the quotient is multiplied by 100. Symbolically, =P, Py, ==> x 100 - "SP,where Po, represents the Price Index, P, represents prices of current year and Po prices of base year. Mlustration: From the following data construct the index for 2006 taking 2000 at base year. Commodity Prices in 2000 Prices in 2006 (Rs) (Rs.) 30 30 35 5 45 45 2s Solution: Construction of Price Index. ‘Commodity Prices in 2000 Prices in 2006 (Rs.) (Rs) 30 30 35 50 43 5 70 = Sumof pricesin 2006 Prige Index for 2006 with 200 as base = Sum of prices in 2000 Symbolically =P 10 265 Py 22 100 = 147.2 180 Hence there is an increase of 47.2% in prices of commodities during the year 2006 as compared to 2000, (ii) Average of Price Relative Method: Under this method, first calculate the price relatives for the various items included in the index and then average the price relatives by using any of the measures of the central value, i.e. A.M.; the median; the mode; the Geometric mean or the Harmonic mean, { ci 10} (0 When arithmetic mean is used p (ii) When geometric mean is used {si x 100) Py, = AL 4 Nwhere N refers to the number of items whose price relatives are averaged. Mlustration: Calculate Index Numbers for 2005, 2006 and 2007 taking 2004 as base from the following data by average of relatives method. Commodity | 2004 2005 2006 Construction of Index Numbers based on Mean of Relatives. 2005 | 2006 2007 2 100 P, 250.0 137.5 125.0 66.7 80.0 | | 6592 Po, = Index with 2004 as base and 2005 as current year f x 100 a] Price Index with 2004 as base arid 2007 as current year F100 x 601.7 N2.Weighted Index Numbers (i) Aggregative Method: These indices are of the simple aggregative type with the only difference that the weights are assigned to the various items included in the index. This method in fact can be described as an extension of the simple aggregative method in the sense that the weights are assigned to the different commodities included in the index. There are various methods by which weights can be assigned and hence a large number of formulae for constructing Index Numbers have been devised. Some commonly used methods suggested by different authorities are as follows ())_Laspeyre’s method. Gi) Paasche’s method. (ii) Fisher’s ideal method. (iv) Marshall Edgeworth method. (¥)_ Kelly's method. (vi) Dorbish and Bowley’s method. (@) Laspeyre’s Method. Laspeyre suggested that for the purposes of calculating Price Indices, the quantities in the base year should be used as weights. Hence the formula for computing price Index number would be : EP ido. EPodo where Po, refers to Price Index, p refers to price of each commodity, P, = x 100 4q refers to quantity of each commodity, © base year, 1 current year, and L refers to the summation of items, The steps for calculating Index Numbers are : (a) Multiply the price of each commodity for current year with its respective Quantity for the base year (P, x q,) and then find out the total of this product 5 (P,qy). (©) Multiply the price of each commodity for the base year with the respective quantity forthe base year (P,xq,) and then find out the total ofthese products for different commodities = (P,4y) (©) Divide 5 (P,qo) with = (P,qp) and multiply the quotient by 100. On the other hand, if Quantity Index isto be calculated, the prices of base year will be used as weights. Symbolically, = Z4Po Oo Sap,” Illustration. Compute Price Index and Quantity Index from data given below by Lespeyre’s method. Items Base year Current year Quantity Price Quantity Price A 6 units 40 paise Tunits 30 paise B 4 units 45 paise Sunits 50 paise c S units 90 paise 1.5 units: 40 paisen of Price and Quantity Indices. Base year Current year Items qo Po a P Pato Pio Pai Pia A 6 ” 7 » 0 180 280 210 B 4 s ” 180 200 ms 250 c 5 ~ Is Ee 4s » 13s o Lpeqo= 465 Lpiqo= 400 Lpoa = 640 Zpiqi= 520 EPido 400 Price Index (Pox) — +100 = 420-100 =86.00 ZaPo 640 Quantity Index (Qn) * Gepe™ 100 Ges 100=137.63 (i) Paasches Method: Under this method of calculating Price Index the quantities of the current year are used as weights. =Pid Syuabotically Price index or Pa Spa. symbolically Price Index or Poy = Sp.q, x. according to Paasche’s method are of the current year prices of different commodities and their respective xq.) and find out the total of the product of different com- Steps of construction Inde» ( Caleutate the product quantities forthe current year (Py modities L(p,* 4.) (ii) Calculate the product of py Gii) Divide EC 4) with Dpqq,) and multiply the quotient ‘Similarly, quantity index is calculated using the current year and qof different commodities and agaregate them 2(Pia)) ‘t by 100 to obtain Price Index. price as weights. Symbolically, ZaqiPs Qn = LqoPi From the data of previous illustration, calculate () Price Index (i) Quantity Index by Ilustration: Paasche’s method. Base year (Current year Items qo Po a PB Posto Pido Pot Pid are 0 1 % 240 180 280 210 B 4 4s 5 #0 189 20 Bs 250 c s %0 1s 0 45 » ibs @ 400 640 520 Price Index Ps, =~ Quantity Index Quy =(ul) Fisher's Ideal Index: Laspeyre has used base ‘year quantities as weights whereas Paasche’s has used Current year quantities as weights for the computation of Index Number of prices. Fisher suggested that both the current year quantities and the base year quantities should be used but geometric ‘mean of the two be calculated and that figure should be the Index Number. Symbolically, [ Ee 2p.a, Spm), (20a ) pees pierre x 100] { =P, 199] = ff 2% |, {2P% ),. 100 Faber Erie. a pode pod Zpodo )” (Epa, Fisher’s Index = ./Laspeyre’s Index x Paasches’s index On the other hand if quantity Indices by this method are to be calculated the geometric mean of the Index Number of quantities with base year prices as weights and Index Number of Quantities with current _year as weights be found out. Symbolically, ae a ZauPo | (He Fisher’s Quantity Index Qu, = ,j| =412. | , {E41} , 100 ns miata fs) (BE IMustration. Construct Index Number of Prices and Quantities from the following data using Fisher's method (2000 = 100). 2000 2007 Commodity Price Qyy. Price Qty. A 7 8 4 6 B 5 10 6 5 c 4 14 5 10 D 2 19 2 B Solution: Calculation of Price and Production Indices. 2000 2007 Items Price (p,) Qty.(q.) Price (p,) Qty.q) Pde Pid Pde Pedi a 2 8 4 G 16 Py 32 2 B 5 10 6 3 50 30 60 25 ic 4 4 5 10 56 30 ” 40 D 2 19 2 B 38 26 38 26 Total 160 130 200 103 (Ra eet Pam 288) < (220) 100 = [22,2 sro0=1256 \ 2p 0d Zp } Vi160 "103 = fe? 5100-647 160 200(iv) Marshall & Edgeworth Method: In this method also both current year as well as base year prices and quantities are considered. The formula is as follows p,- 2do+ Pipi, E4op, +24 Bay +4,}p. * ZaoP. +Ea,P. and Quantity Index is caleulated by the formula x 100 Qy = PAPI , 199 = 2Ped + 2PM, 199 Bp +P.)a0 Epade + EPiao (») Kelly's Method: Truman Kelly has suggested the following formula for constructing Index Number. pia +H = =P4 x 100 where q= =poq 2 | Fo ‘where q refers to the average quantity of two periods. This is also known as fixed aggregative method. (i) Dorbish & Bowley’: Method: Dorbish & Bowley have suggested the simple arithmetic mean of Lespeyre’s and Paasche’s formula. Symbolically. pido , ZPd i P, = 2Pode _EP04 199 (Il) Weighted Average of Price Relatives This method is also known as the Family Budget Method. Weights are values (pp qs) of the base year in this method. The Index Number for the current year is calculated by dividing the sum of the products of the current year’s price relatives and base year values by the total of the weights, ic. the ‘weighted arithmetic average of the price relatives gives the required index numbers. Symbolically, =v Weighted Index number of the current year = y= where / stands for Price Relatives of the current year and V stands for the values of the base year. Ilustration: From the data given below, calculate the Weighted Index Number by using weighted average of Relatives, ‘Commodities Units Base Yr. Qty. Base Year’s Price Current Yr. Price x Quinta 7 6 196 B Ke 6 2 32 ic Dozen 16 36 10 D Metre 21 1s 4 Solution : a Current year's Price Base Year's Price ‘The Price relative of the current year = x 100 205‘The value of the base year = Quantity of base year * Price of the base year Commodities Price Relatives | Value of Weights | Weights x Price Relatives ie. V= page vxt 1120 13,720 120 1,920 89.6 11,200 315 2,939 rv =245.1 Liv =29,779 Ev _ 29779 ‘Weighted Index Number of the Current year = "Sy" =—345 = !21-SAns. In weighted average of relatives, the Geometric mean may be used instead of arithmetic mean. The ‘weighted geometric mean of relatives is calculated by applying logarithms to the relatives. When this mean is used, then formula is: } where 1 =P! x 100.and V = pygo J Po Illustration: Find out price index by weighted average of price relatives from the following commodities using geometric mean Mu i Py= nig | 228! Commodities x " Zz Calculation of Index Number (pr. ) Pes 100 (oa) [ a) v 1 Log! _ V. log! 4 60 ssnaa (4100) 2.1249 127.494 (l © 106.7 (7 x00) 2.0282 121.692 ~100) 21761 21.761 EV log! =270. 947By applying the formula | 270.947) sot [ea (eet etc Tests of Adequacy of Index Numbers Since several formulas have been suggested for the construction of index numbers, then the fuestion arises which method of index: number is the most suitable in a given situation. These are some tests to choose an appropriate index (0) Unit Test: I requires that the method of constructing index should be independent ofthe units ofthe problem. All the methods except simple aggregative method satisfy this test (i) Circular Test: This test was suggested by Westerguard and CM. Walsch. It is based on the shift ability of the base. Accordingly, the index should work in a circular fashion ie. ifan index rhumber is computed for the period 2 on the base period |, and still another index number is ‘computed for period 3 on the base period 2. Then the product should be equal to one. Po x 2* Py x Pno=1 Only simple aggregative and fixed weight aggregative method satisfy the test. Ifthe testis applied to simple aggregative method, we will get Zp. Zp, Eps Zp Xp, =p Tae esis met by simple geometric mean of price relatives and the weighted aggregative of fixed we (ai Time Reversal Test: According to Prof. Fisher the formula for calculating an index number should be such that it gives the same ratio between one point of time and the other, ne matter which of the two time is taken asthe base. In other words, when the data for any two years are \reated by the same method, but with the base reversed, the two index numbers should be reciprocals of each other. Po: x Pio = 1 (omitting the factor 100 from each index). Where Py denotes the index for current year 1 based on the base year 0 and P,, is for current year 0 on the base year 1 It can be easily verified that simple geometric mean of price relatives index, weighted aggregative formula, weighted geometric mean of relatives and Marshall Edgeworth and Fisher's ideal method satisfies the test. Let us see how Fishers ideal method satisfies the test p, = [Pde , 2pm V3pua* Epa By changing time from 0 to | and 1 t0.0 Now Po Pio 207(iv) In other words, factor reversal test is commodit from 100 units to 140 units during the same period, the price and quantity in 2007 are 15 and 140 respectively. The values of consumption (p x q) were Rs. 1000 in 2000 and Rs. 2100 in 2007 giving a value ratio. Substitute the value of P,, and P,, 041 , EPodo _y PyxPp= [Ems Epa” Epa V2Podo Epos Factor Reversal Test: It says that the product of a price index and the quantity index should be ‘equal to value index. In the words of Fisher, just as each formula should permit the interchange of the two times without giving inconsistent results similarly it should permit interchanging the prices and quantities without giving inconsistent results which means two results multiplied together should give the true value ratio. The test says that the change in price multiplied by change in quantity should be equal to total change in value. IfP,, is aprice index for the current year with reference to base year and Q,, is the quantity index for the current year. pia Epoae Then Por * Qo This testis satisfied only by Fisher’s ideal index method. p, = [2Pid , 2a "VE Pode EPoa ‘Changing p to q and q to p. EPide , SUP. Qu {ee x aL EP. — DdoP, (Ea.p)° _ (pia) ZPido ZPrdi 240. EGP _ | VEpiqo Epa Lap. Eqop, VEpa) (p.d) Por X Quo = ed on the following analogy. If the price per unit of a increases from Rs.10 in 2000 to Rs. 15 in 2007, and the quantity of consumption changes Epa _ 21005, Toa 1000 “Thus we find that the product of price ratio and quantity ratio equals the value ratio : LSx 1dChain Base Index ‘The index of a given year on a given fixed base is not affected by changes in the prices or the uantities of any other year. On the other hand, in the chain base method, the value of each period is related with the immediately proceeding period and not with any fixed period. To construct index numbers by chain base method. a series of index numbers are computed for each year with preceding year as the base. These numbers are known as Link relatives. The link relatives when multiplied successively known as the chaining process give link to a common base. The products obtained are expressed as % and give the required index number. The steps of chain base index are (Express the figures of each period as a % of the preceding period to obtain Link Relatives (LR) (These link relatives are chained together by successive multiplication to get chain indices by the formula Chain Base Index (CBI) = (ii) The chain index can be converted into a fixed base index by this formula Current year CBIx Previous year FBI Fixed Base Index (FBI) = 100 Chain relatives are computed from link relatives whereas fixed base relatives are computed directly from the original data. The results obtained by fixed base and chain base index invariably are the same. We shall understand the process by taking some examples. Mlustration: Construct Index Numbers by chain base method from the following data of wholesale prices. Year: 1998 1999 2000 2001 2002 2003 2004 2005-2006 2007 Prices: 75 50 65 6 72 0 6 75 8 & Computation of Chain Index Link Relat Chain Base Index Fixed Base Index 100 100 100 6972100 | 66.67 32.<100=6667 100 78 2066.67 5667 100-8667 100 75 Dy ioo=92.31 22318667 _so.99 $9. 109.230 65 100 75 12080 0 30. 100 = 66.67 75 $,100=130 30 z 2e100=120 =96.00 2 100-96 60 7570 97.2296 70 2003 7» 2, 109-9722 69333 2D xs00es: 72 100, 75 — 69 98.57 x 93.33 69 2004 oo =—* 100 =98.57 ——— =9200 x = 70 100 75 ae 75 108.69 x 92 15 2005 7: 100 = 108.69 ——— = 100.00 =x = 5 @ 100 * 75 ale 84 i. 2006 4 % 100-112 H2x100 11200 Ss to0=112 78 100 7s 80 95.24 x 112 80 7 24100 =95.24 = 2 100= 2007 80 i 106.67 5_x100=106.67 100 It may be seen that index by chain base and fixed base method are same. Mlustration: Construct chain index numbers from the link relatives given below: Year 2003 2004 +2005 2006-2007 LinkRelatives 100. 105 95S N02 Solution Calculations for Chain Base Index Year Link Relatives Chain Index Number 2003 100 100 10s 2004 <= x 100=105.00 105 we 9s 2 > 4105 = 99.75 1005 95 iw 2006 us U5 99.75 =114.7 100 al 2007 102 x 114,75 =137.64 Consumer Price Index Numbers. The consumer price index, known as cost of living index, is calculated to know the average change over time in the prices of commodities consumed by the consumers. The need to construct consumer price index arises because the general index numbers fail to give an exact idea of the effect of the change in the general price level on the cost of living of different classes of people. because a given change in the level of prices affect different classes of people in different manners. Different people consume different commodities and if same commodities then in different proportions. The consumer price index helps us in determining the effect of rise and fall in prices on different classes of consumers living in different area. The consumer price index is significant because the demand for higher wages is based on the cost of living index and the wages and salaries in most nations are adjusted according to this index. We should understand that the cost of living ifidex does not measure the actual cost of living nor the fluctuations in the cost of living due to causes other than the change in price level but its object is to find out how much more 210the consumers of a particular class have to pay for a certain basket of goods and services. That is why the term cost of living index has been replaced by the term price of living index, cost of living price index or consumer price index. ‘The significance of studying the consumer price index is that it helps in wage negotiations and ‘wage contracts. It also helps in preparing wage policy, price policy, rent control, taxation and general economic policies. This index is also used to find out the changing purchasing power of different currencies. Consumer Price Index can be prepared by two methods : (i) Aggregative Method ; i) Weighted Relatives Method. ‘When, aggregative method is used to prepare consumer price index, the aggregative expenditure for ‘current year and base year are calculated and we use the formula given below: Consumer Price index = P19 x 100 EP When weighted relatives method is used then the family budgets of a large number of people for whom the index is meant are carefully studied and the aggregative expenditure of an average family on various items is estimated. In other words, the weights are calculated by multiplying the base year quantities and prices (pqs). The price relatives for all the commodities are prepared and multiplied by the weights. By applying the formula, we can calculate Consumer price Index. Consumer Price Index ue where ne x100and V = pedo Example: Prepare the Consumer price Index for 2007 on the basis of 2000 from the following data by both methods. Commodities Quantities Consumed 2000Solutio Consumer Price Index by Aggregative Method Commodities 4 P Pp Pid Pode 6.00 36.00 34.50 8.00 48.00 30.00 9.00 9.00 6.00 60.00 48.00 6.00 8.00 15,00 20.00 Lpdo=174 ES peqy = 146.5 E.G 5199=!73_ 109 <118.7 Conusumer Price Index = = Poo 146.5 Consumer Price Index by Weighted Relatives Commodities Pi 1 v Vv 6.00 34.50 3600 8.00 30.00 4800 9.00 6.00 900 10.00 48.00 6000 1.50 8.00 600 15.00 20.00 1500 EV=146.5 LIV=17400 5 ‘Conusumer Price Index ==!V = 17400 _ 11g 7 EV M65 ‘They are only approximate indicators of the relatives level ofa phenomenon. ._ Index number are good for achieving one objective, may be unsuitable for the other. . Index numbers can be manipulated in a manner as to draw the desired conclusionUNIT - IV LESSON ANALYSIS OF TIME SERIES ‘When quantitative data are arranged in the order of their occurrence, the resulting statistical series is called a time series. The quantitative values are usually recorded over equal time interval daily, weekly, monthly, quarterly, half yearly, yearly, or any other time measure, Monthly statistics of Industrial Production in India, Annual birth-rate figures for the entire world, yield on ordinary shares, weekly wholesale price of rice, daily records of tea sales or census data are some of the examples of time series. Each has a common characteristic of recording magnitudes that vary with passage of time. Time series are influenced by a variety of forces. Some are continuously effective other make themselves felt at recurring time intervals, and still others are non-recurring or random in nature Therefore, the first task is to break down the data and study each of these influences in isolation. This is known as decomposition of the time series. It enables us to understand fully the nature of the forces at ‘work. We can then analyse their combined interactions. Such a study is known as time-series analysis. ‘Components of time series ‘A time series consists of the following four components: 1. Basie or Secular or Long-time trend; 2. Seasonal variations; 3. Business cycles or cyclical movement; and 4, Erratic or Irregular fluctuations ‘These components provide a basis for the explanation of the past behaviour. They help us to predict the future behaviour. The major tendency of each component or constituent is largely due to casual factors, Therefore a brief description of the components and the causal factors associated with each ‘component should be given before proceeding further. 1. Basic or secular or long-time trend: Basic trend underlines the tendency to grow or decline ‘over a period of years. It is the movement that the series would have taken, had there been no seasonal, cyclical or erratic factors, It is the effect of such factors which are more or less constant for a long time or which change very gradually and slowly. Such factors are gradual growth in population, tastes and habits or the effect on industrial output due to improved methods. Increase in production of automobiles and a gradual decrease in production of food grains are examples of increasing and decreasing secular trend. [All basic trends are not of the same nature. Sometimes the predominating tendency will be a ‘constant amount of growth. This type of trend movement takes the form of a straight line when the trend values are plotted on a graph paper. Sometimes the trend will be constant percentage increase or decrease. This type takes the form of a straight line when the trend values are plotted on a semi- logarithmic chart. Other types of trend encountered are “logistic”, “S-curyes”, ete Properly recognising and accurately measuring basic trends is one of the most important problems in time series analysis. Trend values are used as the base from which other three movements are measured. Therefore, any inaccuracy in its measurement may vitiate the entire work. Fortunately, the ‘causal elements controlling trend growth are relatively stable. Trends do not commonly change their nature ‘quickly and without warning. It is therefore reasonable to assume that a representative trend, which has ‘characterized the data for a past period, is prevailing at present, and that it may be projected into the future for a year. 2. Seasonal Variations: The two principal factors liable for seasonal changes are the climate or weather and customs. Since, the growth of all vegetation depends upon temperature and moisture, agricultural activity is 213confined largely to warm weather in the temperate zones and to the rainy or post-rainy season in the torried zone (Cropical countries or sub-tropical countries like India). Winter and dry season make farming a highly seasonal business. This high irregularity of month to month agricultural production determines largely all harvesting, marketing, canning, preserving, storing, financing, and pricing of farm products, Manufacturers, bankers and merchants who deal with farmers find their business taking on the same seasonal pattern which characterise the agriculture of their area. ‘The second cause of seasonal variation is custom, education or tradition. Such traditional days as Dewali, Christmas, Id etc., product marked variations in business activity, travel, sales, gifts, finance, accident, and vacationing. The successful operation of any business requires that its seasonal variations be known, measured and exploited fully. Frequently, the purchase of seasonal item is made from six months to a year in advance, Departments with opposite seasonal changes are frequently combined in the same firm to avoid dull seasons and to keep sales or production up during the entire year, Seasonal variations are measured as a percentage of the trend rather than in absolute quantities, The seasonal index for any month (week, quarter ete.) may be defined as the ratio of the normally expected value (excluding the business cycle and erratic movements) to the corresponding trend value. When cyclical movement and erratic fluctuations are absent in a time series, such a series is called normal. Normal values thus are consisting of trend and seasonal components. Thus when normal values are divided by the corresponding trend values, we obtain seasonal component of time series, 3. Business Cycle: Because of the persistent tendency for business to prosper, decline, stagnate, recover; and prosper again, the third characteristic movement in economic time series is cwiled the business cycle, The business cycle does not recur regularly like seasonal movement, but moves in Tesponse to causes which develop intermittently out of complex combinations of economic and other considerations. When the business of a country or a community is above or below normal, the exeess deficiency is usually attributed to the business cycle. Its measurement becomes a process of contrast occurrences with @ normal estimate arrived at by combining the calculated trend and seasonal movements, The measurement of the variations from normal may be made in terms of actual quantities or it may be made in such terms as percentage deviations, which is generally more satisfactory method as it places the measure of cyclical tendencies on comparable base throughout the entire period under analysis 4. Erratic or Irregular Component: ‘These movements are exceedingly difficult to dissociate quantitatively from the business cycle. Their causes are such irregular and unpredictable happenings such as wars, droughts, floods, fires, pestilence, fads and fashions which operate as spurs or deterrents upon the Progress of the cycle. Examples of such movements are: high activity in middle forties due to erratic effects of 2nd world war, depression of thirties throughtout the world, export boom associated with Korean War in 1950. The common denominator of every random factor is that it does not come about as a result of the ordinary operation of the business system and does not recur in any meaningful manner. Mathematical Statement of the Composition of Time Series A time series may not be affected by all type of variations. Some of these type of variations may affect a few time series, while the other series may be effected by all of them. Hence, in analysing time series, these effects are isolated. In classical time series analysis it is assumed that any given observation is made up of trend, seasonal, cyclical and irregular movements and these four components have ‘multiplicative relationship, Symbolically: O=TxS*Cx) ‘where O refers to original data, TT refers to trend,, S refers to seasonal variations, C refers to cyclical variations and I refers to itregular variations. This is the most commonly used model in the decomposition of time series. There is another model called Additive model in which a particular observ the sum of these four components, O=T+S+C+41 To prevent confusion between the two models, it should be made clear that in Multiplicative model S, C and I are indices expressed as decimal percents whereas in Additive model S, C and I are quantitative deviations about trend that can be expressed as seasonal, cyclical and irregular in nature. IFin a multiplicative model T = 500, $ = 1.4, C = 1.20 and I= 0.7 then O=TxSxCxI By substituting the values we get = 500% 1.4 1.200, In additive model, T = 500, S = 100, = 500 + 100 + 25-50 = 575 ‘The assumption underlying the two schemes of analysis is that whereas there is no interaction among the different constituents or components under the additive scheme, such interaction is very much present in the multiplicative scheme. Time series analysis, generally, proceed on the assumrtion of multiplicative formulation, in a time series is Methods of Measuring Trend ‘Trend can be determined by: (i) moving averages method and (ii) least-squares method. They are explained below. (@) Method of Moving Averages : The moving average is a simple and flexible process of trend ‘measurement which is quite accurate under certain conditions. This method establishes a trend by means ofa series of averages covering overlapping periods of the data. The process of successively averaging, say, three years data. and establishing each average as the ‘moving average value of the central year in the group, should be carried throughout the entire series. For a five item, seven item or other moving averages, the same procedure is followed: the average obtained each time being considered as representive of the middle period of the group. The choice of a 5-year, 7-year, 9-year, or other moving average is determined by the length of period necessary to eliminate the effects of the business cycle and erratic fluctuations. A good trend must be free from such movements, and if there is any definite periodicity to the cycle, it is well to have the ‘moving average to cover one cycle period. Ordinarily, the necessary periods will range between three and ten years for general business series but even longer periods are required for certain industries. In the preceding discussion, the moving averages of odd number of years were representatives of the middle years. If the moving average covers an even number of years, each average will still be representative of the midpoint of the period covered, but this mid-point will fall half way between the two middle years. In the case of a four year moving average, for instance each average represents a point half way between the second and third years. In such a case, a second moving average may be used to “recentre’ the averages. If the first moving averages gives averages centering half-way between the Years, a further two-point moving average will recentre the data exactly on the years, 215This method, however, is valuable in approximating trends in a period of transition when the ‘mathematical lines or curves may be inadequate. This method provides a basis for testing other types of trends, even though the data are not such as to justify its use otherwise. Example: Calculate S-yearly moving average trend for the time series given below. Year 1980 198] 19821983 1984 1985 1986 1987 1988 19891990 Quantity : 239 242 238 «252-257-250 273-270: 268-288-284 Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Quantity : 282 300-303 298-313. 317309329333. 327 Solution : Year Quantity S-yearly moving total S-yearly moving average 1980 239 1981 22 1982 28 1228 245.6 1983 252 1239 2478 1984 257 1270 254.0 1985 250 1302 2604 1986 m3 1318 263.6 1987 270 1349 2698 1988 268 1383 2766 1989 288 1392 2784 1990 284 1422 284.4 191 2m2 1457 2914 192 300 1467 293.4 193 303 1496 299.2 1994 298 1531 306.2 1995 313 1540 308.0 1996 317 1566 3132 197 309 1601 320.2 1998 329 1615 323.0 1999 333 2000 327 : To simplify calculation work: Obtain the total of first five years data. Find out the difference between the first and sixth term and add to the total to obtain the total of second to sixth term. In this way the difference between the term to be omitted and the term to be included is added to the preceding total in order to obtain the next successive total Example : Fit a trend line by the method of four-yearly moving average to the following time series data, Year : 1991 1992 19931994 1995 1996 19971998, ‘Sugar production (lakh tons) 5 6 1 7 6 8 pyaar Year 1999 2000 2001 2002 ‘Sugar production (lakh tons) 9s co cogent. gnivil 216Solution : 1 Year Sugar Production 4 yearly 4 yearly To recenter trend values (lakh tons) moving moving 2 yearly centred 2 yearly moving total average total average 1 2. 3 4 5 6 1991 3 192 6 1993 i 25 625 1275 6375 . 1994 7 6 6.50 13.50 6.75 195 6 28 7.00 14.50 725 1996 8 30 7.50 15.75 7875 1997 9 3 8.25 1725 8.025 1998 10 36 9.00 18.50 925 19 9 38 9.50 19.50 9.75 2000 0 40 10.00 20.25 10.125 2001 " 41 10.25 2002 u Merits This isa very simple method. 2, The element of flexibility is always present in this method as all the calculations have not to be altered if same data is added. It only provides additional trend values. 3. If there is a coincidence of the period of moving averages and the period of cyclical fluctuations, the fluctuations automatically disappear, 4. The pattern of moving average is determined in the trend of data and remains unaffected by the choice of method to be employed. 5. Itcan be put to utmost use in case of series having strikingly irregular trend. Limitations It is not possible to have a trend value for each and every year. As the period of moving. average increases, there is alway an increase in the number of years for which trend values. ‘cannot be calculated and known. For example, in a five yearly moving average, trend value cannot be obtained for the first two years and last two years, in a seven yearly moving average for the first three years and last three years and so on. But usually values of the extreme years are of great interest 2. There is no hard and fast rule for the selection of a period of moving average. Forecasting is one of the leading objectives of trend analysis. But this objective remains unfulfilled because moving average is not represented by a mathematical function. ‘Theoretically itis claimed that cyclical fluctuations are ironed out if period of moving average coincide with period of cycle, but in practice cycles are not perfectly periodic. Method of Least Squares: If a straight line is fitted to the data it will serve as a satisfactory 217trend, perhaps the most accurate method of accomplish two results. ing is that of least squares. This method is designed to (The sum of the vertical deviations from the straight line must equal zero. (i) ‘The sum of the squares of all deviations must be less than the sum of the squares for any other conceivable straight line ‘There will be many straight lines which can meet the first condition. Among all different lines, only ‘one line will satisfy the second condition. It is because of this second condition that this method is known as the method of least squares. It may be mentioned that a line fitted to satisfy the second condition, will automatically satisfy the first condition. The formula for a straight-line trend can most simply be expressed as Yat ox where X represents time variable, Y, is the dependent variable for which trend values are to be calculated, ‘and b are the constants of the straight line to be found by the method of least squares. Constant a is the Y-intercept. This is the difference between the point of the origin (0) and the point when the trend line and Y-axis intersect. It shows the value of Y when X= 0, constant b indicates the slope which is the change in Y for each unit change in X. Let us assume that we are given observations of Y for n number of years. If we wish to find the values of constants a and b in such a manner that the two conditions laid-down above are satisfied by the fitted equation Mathematical reasoning suggests that, to obtain the values of constants a and b according to the Principle of Least Squares, we need to solve the following two equations. Ly=na+ oy @ DxY = aX + bLxY (i) Solution of the two normal equations yield the following values for the constants a and b plnExY-ExEy nQX?-(ExP af? ae BTR OEX Least Squares Long Method: It makes use of the above mentioned two normal equations without attempting to shift the time variable to convenient mid-year. This method is illustrated by the following example, Example : Fit a linear trend curve by the least-squares method to the following data Year Production (Kg.) 1995 3 1996 5 1997 6 1998 6 1999 8 2182000 10 2001 " 2002 2 2003 B 2004 Is Solution: The first year 1995 is assumed to be 0, 1996 would become 1, 1997 would be 2 and so on. The various steps are outlined in the following table. Year Production na " mi XY 1 2 3 4 5 1995 3 0 0 1996 5 1 5 1 1997 6 2 2 4 1998 6 3 18 9 ‘ 1999 8 4 32 16 ‘ 2000 10 5 50 25 ‘ 2001 " 6 6 36 2002 12 7 a 49 2003 b 8 104 o 2004 15 9 13s 81 Total 9 45 506 285 “The above table yields the following values for various terms mentioned below. n=10, DX=45, EX*=285, LY= 89, and LXY= 506 ‘Substituting these values in the two normal equations, we obtain 89 = 10a+45b Ai) 506 = 45a +2856 ) Multiplying equation (i) by 9 and equation (i) by 2, we obtain 801 =90a-+ 405b Aiii) 1012 = 90a +5706 liv) Subtracting equation (ii) from equation iv), we obtain 211 = 165 bor b=211/165 = 1.28 Substituting the value of b in equation (i), we obtain 89= 10a +45 «1.28 89 = 10a +57.60 Wa = 89-57.6 Wa=314 a=31.4/10Substituting these values of a and b in the linear equation, we obtain the following trend line Yo=3.14 + 1.28X Inserting various values of X in this equation, we obtain the trend Values as below Year Observed Y a bxX _ y.(Col.3 +Col. 4) Z 3 4 5 3 3.14 1.28 «0 3.14 5 3.14 1.28% 1 442 6 3.14 1.28 «2 5.70 6 3.14 1.283 698 8 34 1.28 4 8.26 10 3.14 1.28 «5 9.54 2001 " 3.14 1.28*6 10.82 2002 2 3.4 1.28 «7 12.10 2003 B 3.14 1.288 13.38 2004 15 3.14 1.28%9 14.66 Least Squares Method: We can take any other year as the origin, and for that year X would be 0. Considerable saving of both time and effort is possible if the origin is taken in the middie of the whole time span covered by the entire series. The origin would than be located at the mean of the X values. Sum of the X values would then equal 0. The two normal equations would then be simplified to LY=Na xrAxY pr ‘Two cases of short cut method are given below. In the first case there are odd number of years while in the second case the number of observations are even. and xy = brx? Mlustration: Fit a straight line trend on the following data : Year 1996 199719981999 2000-2001» 200220032004 Yn tank 7 7 8 9 Hyinoi 23 “4 ” Solution: Since we have 9 observations, therefore, the origin is taken at 2000 for which X is assumed to be 0. Year «xy 1996 -16 1997 -21 1998 -14 1999 8Thusn=9, ¥=90, D¥=0, UXY=88,and DX ‘Substituting these values in the two normal equations, we get 90 = 9a or a= 90/9 o a= 10 {60 or b = 88/60 or b= 1.47 ‘Trend equation is: ¥.= 10+ 1.47X Inserting the various values of X, we obtain the trend values as below Years Observed Y x a bex Y.( Col, 4+ Col. 5) 1996 4 4 10 1.47 x4 =5.88 4.12 1997 7 3 10 147 «3 =4.41 5.59 1998 7 -2 10 1.47 *-2=2.84 7.06 1999 8 -l 10 147-1 =1.47 8.53 2000 9 0 10 147 0=0 10.00 2001 nN 1 10 147 x1=1.47 147 2002 13 2 10 147 x2=2.94 12.94 2003 14 3 10 147 x 3=441 1441 2004 7 4 10 147 *4=5.88 15.88 Example: Fit a straight line trend to the data which gives number of passenger cars sold (millions) Year 1995 1996 19971998 1999-2000» 20012002 No.ofears 67 53 43 6. <8 of pl Silaivaetide, 50: (millions) Solution Here are two mid-years viz; 1998 and 1999. The mid-point of the two years is assumed to be 0 and the time of six months is treated to be the unit. On this basis the calculations are as shown below: Year Observed ¥ x xY xe 1995 67 7 46.9 49 1996 33 5 26.5 25 1997 43 3 -129 9 1998 6.1 4 6.1 1 1 199 5.62000 79 3 237 9 2001 58 5 290 25 2002 61 7 27 9 Total 478 a 45 y-(C0L9 168 From the above computations, we get the following values - m=8, EX=478, Cx=0. CxY= 8.6, C= 168 Substituting these values in the two normal equations, we obtain 478=8a or a=47.8/8 or a= 5.98 and 8.6= 168 6 or = 8.6/168 or b= 0.051 The equation for the trend line is: Y, = 5.98 + 0.051 ‘Trend values generated by this equation are below. Years Observed YX ork b Y. (Col. 4+ Col. 5) 1995 67 7 $98 0.0s1x-7=-357 S63 1996 $3 5 598 0.051 x-5 =~255 5.728 1997 43 3 598 0.051 -153 5.827 1998 61 1 598 0.051 x-1 =—051 5.939 199 56 I 598 0.051 * 1=0.051 6.031 2000 79 3 598 0.051 x 3=0.153 6.133 2001 58 5 598 — 0.051 x $=0.255 6235 2002 51 7 598 = 0051 x 7=0.357 6337 222This question paper contains 8 printed pages) Your Roll No. HTT HyATS. 7928 B.Comg}} Js Paper VI - BUSINESS MATHE. mAncs AND STATISTICS Part A-Business Mathematics (Admission of 2006 onwards) Time : | Hour Maximum Marks : 25 ara: 1 aver “ype: 25 (Write your Roll No. on the top immediately on receipt of this question paper.) (eet weetwer & Prorat Yue Fe MY Pale Reet we ane siguomi@s FRAG I) Note :- (i) | Answer may be written either in English or in Hindi; but the same medium should be used throughout the paper. (ii) The maximum marks printed on the question paper are applicable for the students of the Cat. ‘B’. These marks will, however, be scaled down proportionately in respect of the students of Cat, “A’ at the time of posting of posting of awards for compilation of result. feof :() ga weH—aa at Ue sith ar RA fit ya aT a Sry, afr wi se a7 mrert yo @ ear wiley | (i) eT WR afer quote ah «Be Ss eniat S fore aywicn #1 aenfd a sive Sh ‘a’ S feria d ide A sad aRorr S eaves S fae Prgaa afta WR, Gard aqui wa A aH ety Attempt All questions, Use of simple calculator and Log Table is allowed. wh weit & oe Sierg) arer deaaex ote attr aor B wet at aya @1An automobile company uses three grades of steel G-I, G-II, and G II for producing three models of car M-I, M-II and M-IIL. The steel requirement (in tons) for each model of car is given below : Car Type MI Mil * MAI Steel G4 2 3 4 Grade Gl 1 1 Hi Gall 3 2 1 Determine the number of cars of cach type which can be produced using 29, 13 and 16 tons of steel of three types respectively. 8 we oR feat wert oR od de disa — Md, Maik Ml war & faq ee wT am aie — G-, G-l si Gall wat oh 2) oR d veiw disa d fy Wa a oraverpan (eit #) ge ve & ORs MI MI M-Il wa GI 2 3 4 wife = Gl 2 I 2 Gill 2 2 1 wore: oe wer & 29, 13 ote 16 eal wr oa wed By eas OT Wea aie ula vo @ ont #1 een Peita Ai) Or (siera) A shop sells 20 table fans, 30 ceiling fans and 10 pedestal fans in a month. The price of a table fan is Rs, 300, of a ceiling fan is Rs. 400 and of pedestal fan is Rs. 500. The cost to the shop is Rs. 220 for one table fan, Rs. 325 for a ceiling fan and Rs. 400 for a pedestal fan, Find the monthly profit of the shop. 8Ww Gort yar AE A 20 Saar oH, 30 ART or GI 10 stem HH ee 81 Ew ae ‘Ba Bt 300 G, ait tr a 400 G, atte treat ha A 500%. HA 81 GW at ww eae SH A 220 &, Mei ar A x25, atk tee GH A 400 w aA oie #1 Barr wr ate arr Bet aA Attempt any two @, There are two concepts of interest-Simple interest and compound interest. Explain the two. It will take how many years for a sum to quadruple itself at 10% per year simple interest and compound interest ? ‘A machine d-preciates at the rate of 10% per annum for the first two years and then 7% per annum for the next 3 years. Depreciation being calculated on the diminishing value. If the value of the machine be Rs. 10,000 initially, find the average rate of depreciation and the depreciated value of the machine at the end of fifth year. The sum of Rs. 2,000, Rs. 3,000, Rs. 4,000 are due at the end of 2, 4 and 8 years respectively. It is proposed to replace this series of payments by a single sum of Rs. 9,000 payable at the end of m years. If the rate of interest is 10% per annum effective, find n. Mr. X deposited Rs. 10,000 in a bank for 3 years offering interest rate of 6% compounded nalf yearly during first year, at the rate of 12% compounded quarterly during second year and at 10% compounded continuously during 3“ year. arg at aftr @ ara a a deert were enor ste afer eror) ait wy eae AS feet wen Br tow affes Tener ast sie amgies aor oR daar a A far af wr? we weit Bt ved cf aut ¥ to% afte a ue ux aeaere vier @ sik fe one at at A roe anffes ue erent eT HoT OR oR fear oT By ae rer Hef aT AST 10,000 Gua en, aa AEE A ater awe car vad ak @ ait 4 ae or Tpaeafter Yea ae FAST | 2.000 %. 3.000 %, site 4,000 &. a Vir mer 2, 4 afk 8 aul H sia 4 a ehh) TA A gr Feet BW 9.000%. FH oH Gwar UAT wfeeenfier we wr vera 8 on al & sit Vea eh ae wend amo ee 10% aff & aan oe wpifore |(iv) ci) Mt uaa A te Aa at S fae 10000 w oT Gay Tel yet at arian amaley uRefrer ox aura Prom, gay a 12% ae wy Ae mangle ufo ast freer atte chat ah 10% orrrere wapghey antec earot PRekrr| 3 ah} oar elev ‘ae afore | For a company the total cost function C and the total revenue function R are given by C = x3 — 12x? + 48x +11 and R = 83x—4x?-21 where x is output. Obtain the output for which profit is maximum and the maximum profit. 5 We Get wT GA ATT GOA C otk Ga TH aT R ge OR AEE Tee C =x3 — 12x? + 48x 411 R = 83x — 4x7 — 21 are x Pte 21 ae Arita sie wet aM items @ ste sift Pr oA ant HC | Or (aera) ‘The demand curve for a commodity is given by: x=20-2p—p? where P and x are the price and the quantity in demand respectively. Find the elasticity of demand for P = 25. For which demand the elasticity will be unity ? 5 We Rg oT sit a yu va e x=20-2p—p? wet P ate x were: ater ok AA wg Arar 21 Pa2s@ fey att A cite eet afore fee Hit BH fey ota yw ert ? tis known that marginal revenue function of a commodity is given by MR = 10~ 5x? Find the revenue function and demand function. 4 We RQ oT Mts sir wert FH NHR fear ras: MR = 10- 5x? SPT SRT BR Fifer User SAT ARTI | Or (sreran) Determine consumer surplus under perfect competition if the demand and supply law is given by P = 25 — x? and P = 2x + 1 respectively. 4 Her ote oft Pra aren ga war fear rare P=25-x? ate P= 2x41 pl wfei rar & siete wetacr sfdaly Petter aifery |This question paper contains & printed pages} Your Roll No. ITH HEPHI, 5367 B.Com/IL ya Paper VI- BUSINESS MATHEMATICS AND STATISTICS (Part A-Business Mathematics) 4 (NC-Admission of 2006 onwards) Time : | Hour Maximum Marks : 25 wos ever oie : 25 (Write your Roll No, on the top immediately on receipt of this question paper.) (ee era & Pad & que Re ae afte carr ue ser sree feerg |) Note = Answer may be written either in English or in Hindi; but the same medium should be used throughout the paper. Wa Fea or Bey ston or fest feet ow are 4 Afory, afar eh oe aT AeA we & et aie) Attempt All questions. Log tables and other tables shall be provided on demand. Use of simple calculator is allowed. eA wer Sify) cht tae cen oer eae He oe A oA) wre Seay wart H arqafa @) e What is a Matrix ? Use this tool for solving the following problem Three firms A, B and C supplied 40, 35 and 25 truck loads of stones and 10, 5 and 8 truck loads of sand respectively to a contractor. If the cost of stone and sand are Rs. 1,200 and Rs. 500 per truck load respectively, find the total amount paid by the contractor to each of these firms. 8 Afeae ae eth 8? Prafefter ere a a oer & fae ge STH wT Tra aifery: am oH A.B otk CA uw Soar Gt AT: 40, 36, afte 25 FH AR TER SiR 10, 5,8 RH a Ya A Of G1 ale cee sie Ya A ara wT 1,200 B. she 500 BW. UA Zw AIR e, aa ddan art gt wal AA welw at A ug qo wh gra Fife!Or (areran) Food J has 3 units of Vitamin A, 9 units of Vitamin B and 12 units of Vitamin C. Food I has 6, 9 and 15 units respectively and Food III has 9, 0, 9 units respectively. 33 units of Vitamin A, 27 of B and 60 of C are required. Find the amount of three,foods that will provide exactly these amounts. Solve by matrix inverse method. 8 wa 149 afte Re A, 9 ae Rei Babe 12 aPe Rena Cy era A sore 6,9 atk 15 & ote wre I A mar 9, 0 te o afte #1 Rca Ad 93 afc, Ba 27 afte atk CS 60 alc A ora 81 ga Aa Te A ae TAT aT aay at ta 7 Ararat BH URI BWM Aha wha AR ENT sa BRITA Attempt any two 4x28 (® The compound interest on a certain sum of money for two years is Rs. 126 and simple interest for two years at the same rate is Rs. 120. Find the rate of interest. (i) A machine depreciates at the rate of 8% of its value at the beginning of a year ‘The machine was purchased for Rs. 1,00,000. The scrap value realized when sold was Rs. 43,440. Find the number of years the machine was sold ? (iii) A certain sum of money at compound interest becomes Rs. 6,655 in 3 years and Rs. 7,320.50 in four years. Find the rate of interest. (iv) What is effective rate of interest ? Which is better investment-9% converted monthly or 9.1% converted semi-annually aig a afte @ ww Par wor we et af d fry amas aot 126 &. @ oie Ue ae He at ae faq WIR Vs 120 8. | aot ae sar Ay | Gi) www wr ad S met A om IS ow A ww AEA ot Bi 4.00.00. ae arf oy Ray ae 49.440 & BHT Hee wet ETN Ter wae A aii or fever anf weer Ko? Gi) Woe Yon amas wre Ww 3 TH 6655 ¥. et ach 8 she ax af H 7.32050 ¥. iio a are wf! (iv) wa aS eS aa aTeRi zt ? ae Pate rr 8 — 9% oy afte oRafeier sierar 9.1% UX sefarfiter oftafeta ?A @ (i) ‘The cost function of a manufacturing company is given by: C = 0.1x3 — 3x? + 60x. Find the value of x at which slope of average cost is zero. Also verify that AC = MC at this value of x 3 We PAPAbT ah or aa were C = 0.1x3 — 3x? + 60x. x OT We aL ait afore fore oe shee ore # sa ya Bi x o ea aM we AC=MC @1 af aearert anfery | Find the marginal revenue function for a monopolist if the demand function is : x =20-10P 2 art wert x = 20-10P em w yaar & fae wid ae wer ant watery | Or (wreran) Out of the following two functions, one is demand function and the other is the supply function. Determine, which one is demand function and which one is the supply function : P=V100—x? P10 Where Pis price per unit and x is quantity. Also determine the elasticities of demand and supply at equilibrium price. 5 Preafertter eh ara AS yew abr ors & atte quer URE wert | Prulfter are A br parr ara atte gwar wre P=Vvi00—x? x=2P-10 wel P sft garg wre site x Hrar water Pra ae sila atte of a cite at Praifter afore 1(B) A firm has the following marginal revenue and marginal cost function : MR = 50 4x and MC =~20 + 2x. The firm suffers a loss of Rs. 200 when no units are sold. (Determine total profit function. (ii) Find break-even points. (iii) Determine the profit enclosed between these two break-even points. ve et or Mia oimra otk eatin Gera wer Praferftad & MR = 50 ~ 4x IC = -20 + 2x. ont arr wg gang = Bey we 200 ©. a BIA eel 8: @ Ge art wert Putte ase Gi) art—sramt sifted fay srr afte | rant witede fags ¥ anata arr Patter wAfore | Or Gi) A ar (sreran) Find consumer surplus for the demand function x =525—20p—p? if the quantity” demanded is 264 units, 4 HPT ert x = 525 — 20p — p? & fay writen afte ert Airy ale 264 gargat wt tT a1