Lecture 2

Topics for today

Possible problems in Quantitative Analysis Approach

Variables and their types

Some basic concepts relating probability

Derivatives

Possible Problems in the Quantitative Analysis

Approach
Problems are not easily identified
Conflicting viewpoints-linear or non linear relationship
Beginning assumptions
Fitting the textbook models
Validity of data
Hard-to-understand mathematics and statistics

Variables and their Types

Ratio scale
Two values of a variable say X1 and X2,
(i)X1/X2 (ii)(X1-X2) (iii) X1 X2 and vice versa are meaningful quantities. Most economic
variable are ratio scale.

Interval Scale
Satisfies last two properties. Distance b/w two time periods (2012-1990) is meaningful.
But 1990/2012 is senseless.

Ordinal Scale
Only it satisfies the third property of ratio scale. Grades, A,B,C,D. Upper, Middle, Lower.
Example: Indifference curve in Economics

Nominal Scale:
None of the feature of ratio scale. Gender, male, female, marital status, single, married,
divorced, unmarried simply denote categories

Probability

A probability is a numerical statement about the chance that an event will occur.

Two basic rules regarding the probability

1- The probability, p, of any event is greater than or equal to 0 and less than or
equal to 1. 0p1

A- 0 means that an event is never expected to occur

b- 1 means that an event is always to occur.
2- The sum of the simple probabilities for all possible outcomes of an activity must be
equal to 1.
Examples:
Quantity Demanded
0
1
2
3
4

Number of days
40 p=40/200 (.20)
80 p=80/200 (.40)
50 p=(50/200) (.25)
20
10

Types of probability
Two different ways to determine the probability

Objective p(event)= number of occurrence of the event /total number of events

Examples: tossing of a fair coin- it is based on the previous logic.

Subjective: logic and history are not appropriate. So subjectivity arises.

Examples

What is the probability that floods will come?

What is the probability that depression will come in an economy?

Which party will win the coming election in Pakistan?

For this opinion polls are conducted and then probabilities are found.

Mutually exclusive and collectively exhaustive events

Mutually exclusive events : If only one of the event can occur on any one
trial.

Collectively exhaustive events: They are said to be mutually exhaustive if

the list include all the possible outcomes i.e. A U B= S.

Not mutually exclusive

The occurrence of one event does not restrict the occurrence of the other event.

Examples: Drawing a 5 and drawing a diamond from a deck of cards- it can be both
5 and diamond

Adding mutually exclusive events

We are interested in whether one event or second event will occur.
When events are mutually exclusive the law of addition is simply as follows.
P(event A or event B)= p(event A)+ p(event B)
Drawing spade or drawing a club out of a deck card are mutually exclusive. 13/52+13/52=1/2
Venn diagram
Addition of not mutually exclusive events.

P(A or B)= P(A)+P(B)-P(A and B)

Venn diagram
Examples:
In a math class of 30 students, 17 are boys and 13 are girls. On a unit test, 4 boys and 5 girls
made an A grade. If a student is chosen at random from the class, what is the probability of
choosing a girl or a student with A Grade?
P(girl or A)= P(girl)+ P(A)- P(girl and A)= 13/30+9/30-5/30=17/30

Some Basic Concepts in Mathematics

Derivatives

Definition

Maxima

Minima

Rules of Derivatives
1- Constant function rule

2- Power function rule

3- Sum difference rule
4- Product rule
5- Quotient rule
6- Chain rule
7- Inverse function rule
8- Partial Derivatives

Notation
Dependent variable
Explained variable
Predictand
Regressand
Response
Endogenous
Outcome
Controlled variable
LHS

Independent variable
Explanatory variable
Predictor
Regressor
Stimulus
Exogenous
Covariate
Control variable
RHS

Summary

Quantitative techniques not free from problems

Probability

Variables and their types

Derivative