APPLY MATHEMATICAL ANALYSIS TO ECONOMIC AND FINANCIAL

INFORMATION
US 252036
NQF LEVEL: 5
CREDITS: 6
NOTIONAL HOURS: 60

LEARNER GUIDE

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Table of Contents
HOW TO USE THIS GUIDE.............................................................................................3
ICONS..............................................................................................................................3
PROGRAMME OVERVIEW.............................................................................................4
PURPOSE........................................................................................................................4
LEARNING ASSUMPTIONS............................................................................................4
HOW YOU WILL LEARN................................................................................................. 4
HOW YOU WILL BE ASSESSED....................................................................................4
SECTION 1: COLLECTING AND ORGANISING DATA USING MATHEMATICAL
TECHNIQUES..................................................................................................................... 5
1.1 INTRODUCTION........................................................................................................6
1.2 TYPES OF DATA COLLECTION METHODS (SO 1, AC 1).......................................7
1.3 COLLECTING FINANCIAL AND DEMOGRAPHIC INFORMATION (SO 1, AC 2). .14
1.4 RECORDING DEMOGRAPHIC AND FINANCIAL DATA (SO 1, AC 3)...................17
SECTION 2: CALCULATING AND REPRESENTING DATA...................................21
2.1 INTRODUCTION......................................................................................................22
2.2 REPRESENTING DATA IN GRAPHICAL FORMAT (SO 2, AC 4)..........................24
2.3 MEASURES OF CENTRAL TENDENCY AND STANDARD DEVIIATIONS (SO 2,
AC 1).............................................................................................................................. 34
2.4 CALCULATING LINES OF BEST FIT (SO 2, AC 2).................................................39
2.5 CALCULATING TIME VALUE OF MONEY (SO 2, AC 3)........................................43
SECTION 3: MATHEMATICAL ANALYSIS TO INDICATE ECONOMIC
RELATIONSHIPS..............................................................................................................50
3.1 INTRODUCTION......................................................................................................51
3.2 THE SLOPE OF A RELATIONSHIP (SO 3, AC 1, AC 2, AC 3)...............................52

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HOW TO USE THIS GUIDE

This workbook belongs to you. It is designed to serve as a guide for the duration of your training
programme and as a resource for after the time. It contains readings, activities, and application
aids that will assist you in developing the knowledge and skills stipulated in the specific outcomes
and assessment criteria. Follow along in the guide as the facilitator takes you through the
material, and feel free to make notes and diagrams that will help you to clarify or retain
information. Jot down things that work well or ideas that come from the group. Also, note any
points you would like to explore further. Participate actively in the skill practice activities, as they
will give you an opportunity to gain insights from other people’s experiences and to practice the
skills. Do not forget to share your own experiences so that others can learn from you too.

ICONS

For ease of reference, an icon will indicate different activities. The following icons indicate
different activities in the manual.

Outcomes Learning Activities

Take note
Assessment Note!

Stop and Think!

Course Material Reflection

Notes (Blank) References

Definition Summaries

Example

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PROGRAMME OVERVIEW

PURPOSE
This Unit Standard is intended for managers in all economic sectors. These managers would
typically be second level managers such as heads of department, section heads or divisional
heads, who may have more than one team reporting to them.

The qualifying learner is capable of:

 Using mathematical techniques to collect and organise data.

 Applying mathematical analysis to calculate and represent financial and economic data.
 Applying mathematical analysis to indicate economic relationships.

LEARNING ASSUMPTIONS

It is assumed that learners are competent in:

 Communication at NQF Level 4.
 Mathematical Literacy at NQF Level 4.
 Computer Literacy at NQF Level 4

HOW YOU WILL LEARN

The programme methodology includes facilitator presentations, readings, individual activities,

group discussions, and skill application exercises.

HOW YOU WILL BE ASSESSED

This programme has been aligned to registered unit standards. You will be assessed against the
outcomes of the unit standards by completing a knowledge assignment that covers the essential
embedded knowledge stipulated in the unit standards, and by doing a practical assessment to
apply the learning to your work situation. When you are assessed as competent against the unit
standards, you will receive a certificate of competence and be awarded 6 credits towards a
National Qualification.

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SECTION 1: COLLECTING AND ORGANISING
DATA USING MATHEMATICAL TECHNIQUES

Specific Outcome
Use mathematical techniques to collect and organise data.

Assessment Criteria
On completion of this section you will be able to:

 Appropriate methods are selected for collecting, recording and

organising financial and/economic data. (SO 1, AC 1)
 Financial and demographic relevant to the unit are collected. . (SO
1, AC 2)
 Financial and demographic relevant to the unit are recorded in a
usable format. (SO 1, AC 3)

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1.1 INTRODUCTION

The data collection is to collect important information to keep on record for further use, to make
important decisions about different issues, and to pass vital information on to others.
In terms of the method of data collection that will be used for the study, there are mainly two types
of data:

 Primary data
 Secondary data

Primary Data

They are collected afresh and for the first time, and thus happens to be original in character. They
are the most original data and mostly have not undergone any sort of statistical test.

Secondary Data

They are those that has already been collected by someone else and which has been already
been passed through the statistical process. They are not pure and have undergone some
treatment at least once.

Data Edition:

After collecting the required data, either from primary or secondary means, the next step leads to
edition. Editing is a process by which the data collected is examined to discover any error and
mistake before it is presented. It has to be understood before hand it self to what degree the
accuracy is needed and to what extent the errors can be tolerated in the inquiry. The editing of
secondary data is much simpler than that of primary data.

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1.2 TYPES OF DATA COLLECTION METHODS (SO 1, AC 1)

Data collection simply defines that, how the information was gathered? It is known as data
collection.

There are two different methods of data’s are collected in data collection.

 Primary data
 Secondary data.

And these two data collection methods are having some important tools used for collecting data.
Such a data collection tools used for the two methods are given below:

Primary data tools are interviews, surveys, direct observations, focusing groups.

Secondary data tools are telephone, mobile phones, e - mails, post cards, etc.

SELECTING APPROPRIATE DATA COLLECTION METHOD

As there are many method to collect the data it important that we choose the most appropriate
according to the situation provided. So the following factors has to be kept in mind while selecting
a particular method:

1. The nature, the scope as well as the object of the enquiry is very important as it will effect
the choice of the method.
2. When a method is chosen its important to check whether there is adequate amount of
funds to make it work. If the method is too expensive, it will be very hard to do the
experiment.
3. Time is an important factor as decided when the experiment has to end.
4. Precision is also another important factor.

But it must be always remembered theta each method of data collection has its use and none is
superior in all situations.

After data collection, the method can be broadly divided into two types

 Ungrouped data: They are those datas that are not arranged in any systematic order. It
can be arranged only in ascending or descending order. They are also termed as raw data.

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  Grouped data: They are datas that are presented in the form of frequency distribution.

PRIMARY DATA COLLECTION METHODS

The methods of collecting primary and secondary data are very different since primary data are
really originally collected of the data, while if we take the secondary data the nature of data
collection work here is nothing but mere compilation.

Primary Data Methods

 The primary data is the one type of important data. It is collection of data from first hand
information.
 This information published by one organization for some purposes. This type of primary
data is mostly pure and original data
 The primary data collection is having three different data collection methods.

Those are explained given below:

Data Collection through Investigation:

In this method, trained investigators are working as employees for collecting the data. The
researchers will use the tools like interview and collect the information from ask required questions
from the individual persons.

Personal Investigation Methods:

The researchers or the data collectors has conducted the survey and collecting data. This method
we have to collect more accurate data and original data. This method is useful for small data
collection only not big collection of data projects.

Data Collection through Telephones:

The data researcher used the tools like telephones and mobile phones collect the information or
data. This is accurate and very quick process for data collection. But information is not accurate
and true.

Secondary Data Collection Methods

The secondary data is the other type of data, which is collection of data from second hand
information. This information is known as, given data is already collected from any one persons for
some purpose, and it has available for the present issues. And mostly these secondary data’s are
not relevant and pure or original data

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The secondary data collection methods also having two important methods:

a) Official methods:

Data collecting from the ministry of finance, Agriculture, Industry and etc. These data collection
methods are official methods. This methods are used the tools of phone calls, surveys.

b) Semi–official methods:

This is the method of data collection from, Railway boards, banks, population committee and etc.
This methods only used for the focusing groups, and interviews, and electronic mail surveys.
These all are the different methods of data collection methods and tools.

Secondary Data: Ways of Collections

In this case the data's are already available, it means the data's are already collected and
analyzed by someone else. It can be either published or unpublished data. When using the
secondary data, the following characteristics must be followed:

 Reliability
 Suitability
 Adequate data

These data's can be collected from the following places:

a) Official
b) Newspapers and journals
c) Research organizations like universities.

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QUANTITATIVE AND QUALITATIVE DATA COLLECTION METHODS
The Quantitative data collection methods rely on random sampling and structured data
collection instruments that fit diverse experiences into predetermined response categories. They
produce results that are easy to summarize, compare, and generalize.
Quantitative research is concerned with testing hypotheses derived from theory and/or being able
to estimate the size of a phenomenon of interest. Depending on the research question,
participants may be randomly assigned to different treatments. If this is not feasible, the
researcher may collect data on participant and situational characteristics in order to statistically
control for their influence on the dependent, or outcome, variable. If the intent is to generalize from
the research participants to a larger population, the researcher will employ probability sampling to
select participants.

Typical quantitative data gathering strategies include:

 Experiments/clinical trials.
 Observing and recording well-defined events (e.g., counting the number of patients waiting
in emergency at specified times of the day).
 Obtaining relevant data from management information systems.
 Administering surveys with closed-ended questions (e.g., face-to face and telephone
interviews, questionnaires etc).

1. Interviews
In Quantitative research (survey research),interviews are more structured than in Qualitative
research. In a structured interview, the researcher asks a standard set of questions and nothing
more
 Face -to -face interviews have a distinct advantage of enabling the researcher to
establish rapport with potential participants and therefore gain their cooperation. These
interviews yield highest response rates in survey research. They also allow the researcher
to clarify ambiguous answers and when appropriate, seek follow-up information.
Disadvantages include impractical when large samples are involved time consuming and
expensive
 Telephone interviews are less time consuming and less expensive and the researcher
has ready access to anyone on the planet that has a telephone. are that the response rate
is not as high as the face-to- face interview but considerably higher than the mailed
questionnaire. The sample may be biased to the extent that people without phones are part
of the population about whom the researcher wants to draw inferences.
 Computer Assisted Personal Interviewing (CAPI): is a form of personal interviewing, but
instead of completing a questionnaire, the interviewer brings along a laptop or hand-held
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 computer to enter the information directly into the database. This method saves time
involved in processing the data, as well as saving the interviewer from carrying around
hundreds of questionnaires. However, this type of data collection method can be expensive
to set up and requires that interviewers have computer and typing skills.

2. Questionnaires
a) Paper-pencil-questionnaires can be sent to a large number of people and saves the
researcher time and money. People are more truthful while responding to the
questionnaires regarding controversial issues in particular due to the fact that their
responses are anonymous. But they also have drawbacks. Majority of the people who
receive questionnaires don't return them and those who do might not be representative of
the originally selected sample.
b) Web based questionnaires: A new and inevitably growing methodology is the use of
Internet based research. This would mean receiving an e-mail on which you would click on
an address that would take you to a secure web-site to fill in a questionnaire. This type of
research is often quicker and less detailed. Some disadvantages of this method include the
exclusion of people who do not have a computer or are unable to access a computer. Also
the validity of such surveys are in question as people might be in a hurry to complete it and
so might not give accurate responses. Questionnaires often make use of Checklist and
rating scales. These devices help simplify and quantify people's behaviours and attitudes. A
checklist is a list of behaviours, characteristics, or other entities that the researcher is
looking for. Either the researcher or survey participant simply checks whether each item on
the list is observed, present or true or vice versa. A rating scale is more useful when
behaviour needs to be evaluated on a continuum. They are also known as Likert scales.
c) Writing good survey questions

Rules for writing good questions are given below:

 Rule 1. Use correct spelling, punctuation and grammar style.
 Rule 2. Use specific questions. For example, “did you read a newspaper yesterday?”,
instead of “did you read a newspaper?”.
 Rule 3. Use a short introduction to question of behaviours. In this way you cannot only
refresh the memory of the respondent, but also explain what you mean with the concept
you are using. For example, with wines, you may not only mean red or white wine, but
liqueurs, cordials, sherries, tables wines and sparkling wines.
 Rule 4. Avoid the use of technical terms and jargon. An exception to this rule are questions
that are made for a specific group of respondents, who regularly use jargon, e.g., doctors,
lawyers and researchers.

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  Rule 5. Avoid questions that do not have a single answer. For example, “do you like to walk
and to bike to school?”. Somebody who likes to walk, but does not like to cycle, cannot
answer this question in the right way.
 Rule 6. Avoid negative phrasing, e.g., “should the school not be improved?”. This can lead
to confusion and cost more effort to answer the question correctly.
 Rule 7. Avoid words and expressions with multiple-meanings, like any and just.
 Rule 8. Avoid stereotyping, offensive and emotionally loaded language
d) Response formats

Usually, a survey consists of a number of questions that the respondent has to answer in a set
format. A distinction is made between open-ended and closed-ended questions. An open-ended
question asks the respondent to formulate his own answer, whereas a closed-ended question has
the respondent pick an answer from a given number of options. The response options for a closed-
ended question should be exhaustive and mutually exclusive. Four types of response scales for
closed-ended questions are distinguished:
 Dichotomous, where the respondent has two options
 Nominal-polychromous, where the respondent has more than two unordered options
 Ordinal-polychromous, where the respondent has more than two ordered options
 (bounded)Continuous, where the respondent is presented with a continuous scale
A respondent's answer to an open-ended question is coded into a response scale afterwards.

Qualitative data collection methods play an important role in impact evaluation by providing
information useful to understand the processes behind observed results and assess changes in
people’s perceptions of their well-being. Furthermore qualitative methods can be used to improve
the quality of survey-based quantitative evaluations by helping generate evaluation hypothesis;
strengthening the design of survey questionnaires and expanding or clarifying quantitative
evaluation findings. These methods are characterized by the following attributes:
 they tend to be open-ended and have less structured protocols (i.e., researchers may
change the data collection strategy by adding, refining, or dropping techniques or
informants)
 they rely more heavily on interactive interviews; respondents may be interviewed several
times to follow up on a particular issue, clarify concepts or check the reliability of data
 they use triangulation to increase the credibility of their findings (i.e., researchers rely on
multiple data collection methods to check the authenticity of their results)
 generally their findings are not generalizable to any specific population, rather each case
study produces a single piece of evidence that can be used to seek general patterns
among different studies of the same issue
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Regardless of the kinds of data involved, data collection in a qualitative study takes a great deal of
time. The researcher needs to record any potentially useful data thoroughly, accurately, and
systematically, using field notes, sketches, audiotapes, photographs and other suitable means.
The data collection methods must observe the ethical principles of research.

The qualitative methods most commonly used in evaluation can be classified in three broad
categories:
 in-depth interview
 observation methods
 document review

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 1.3 COLLECTING FINANCIAL AND DEMOGRAPHIC INFORMATION (SO 1, AC 2)

Financial information is diverse and may have various facets, depending on the reviewer and the
objective of the study. Many corporate data summaries provide bits of financial information that
management relies on to make decisions and steer operating activities to financial success. Data
sets incorporating financial information include budgets, pro forma reports, production worksheets
and financial statements. The following are examples of financial data;

Budgets

 Budgets enable organizations to test the business impact of specific activities and decide whether
it's worth pursuing them or better to change course. These initiatives include sales and marketing,
research and development, financial accounting and reporting, investment management and
corporate treasury. The idea is to review corporate work streams to highlight areas where a
company is losing money and whether it could save some cash by preventing excessive spending
and running a tighter ship.

Pro Forma Reports

 Pro forma reports offer financial information that draws on projections or corporate management's
assumptions. They provide a window into top leadership's thinking and show readers whether this
thought process collides or agrees with the market consensus. For example, if a company's
leadership predicts a 10 percent sector growth rate while the industry consensus hovers around
six percent, investors may believe the organization's leadership is overly optimistic or has lost
touch with the competitive reality. Pro forma data summaries may apply to various performance
data, including financial statements.

Production Worksheets

 Production worksheets provide valuable reams of data about a company's manufacturing

processes, as well as the tools, procedures and methodologies it relies on to produce goods at
affordable prices. By delving into a manufacturing template, a reader can see how much the
business spends on each item and the money it pays to store production outputs, such as raw
materials, work-in-process items and completely finished goods. A production worksheet also
indicates to department heads and manufacturing foremen how much the business spends on
labor costs and whether it can reduce such expenses by reducing its workforce or shedding the
number of allowed overtime hours.

Financial Statements

 Financial statements are, by essence, the trove of financial information that investors comb
through before making asset allocation decisions. A complete set of financial statements runs the

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gamut from balance sheets and statements of profit and loss to statements of cash flows and
shareholders' equity reports.

Sources of financial data

 Financial reports: Financial reports are usually the first place to look because they’re easy
to find and already formatted in a way that’s simple to analyze. Not just mean the annual
reports, either — the quarterly reports, monthly reports, and everything else are important
as well.
 Reports regarding inventory, production, and employment: Corporations, particularly larger
ones, will distribute reports on inventory, production, and employment occasionally,
especially when prompted by one organization or another that’s attempting to compile
economic reports.
 Accounting records: If you’re able to get your hands on the corporation’s accounting
records, those are easily the most comprehensive and detailed sources of data you can
find.
 Internet Sources: For information about stock price, try the Google Finance page, but lots
of websites are available, all providing basically the same information. For other corporate
financial information.

COLLECTING DEMOGRAPHIC INFORMATION

Demographics is defined as statistical data about the characteristics of a population, such as the

age, gender and income of the people within the population.

NB
Demographics are characteristics of a population. Characteristics such as race, ethnicity, gender,
age, education, profession, occupation, income level, and marital status, are all typical examples
of demographics that are used in surveys.

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Demographic data can be collected by;

 Census. A census is a study that obtains data from every member of a population. In most
studies, a census is not practical, because of the cost and/or time required.

 Sample survey. A sample survey is a study that obtains data from a subset of a
population, in order to estimate population attributes.

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1.4 RECORDING DEMOGRAPHIC AND FINANCIAL DATA (SO 1, AC 3)

The final step in data collection is the physical process of recording the data in some type of
notebook (hard copy), computer file (electronic copy), or other permanent “record” of the work
done.

The physical formats for recording data vary considerably, from measurements or observations to
photographs or interview tapes. However data are recorded, it is important to keep in mind that the
purpose of any record is to document what was actually done and the results that were achieved.

In recording data, keep two simple rules in mind to avoid problems later, should someone ask
about or question your work:

 Hard-copy evidence should be entered into a numbered, bound notebook so that there is
no question later about the date the experiment was run, the order in which the data were
collected, or the results achieved. Do not use loose-leaf notebooks or simply collect pages
of evidence in a file. Do not change records in a bound notebook without noting the date
and reasons for the change.
 Electronic evidence should be validated in some way to assure that it was actually
recorded on a particular date and not changed at some later date. It is easy to change
dates on computers and thereby alter the date a particular file seems to have been
created. If you collect your data electronically, you must be able to demonstrate that they
are valid and have not been changed.

As you record your data, it may be helpful to think about them as the legal tender of research—the
currency researchers cash in when they apply for grants, publish, are considered for promotion,
and enter into business ventures. To have and hold their value, research data must be properly
recorded.

Using a table

Tables are used to present numerical data in a wide variety of publications from newspapers,
journals and textbooks to the sides of grocery packets. They are the format in which most
numerical data are initially stored and analysed and are likely to be the means you use to organise
data collected during experiments and dissertation research. However, when writing up your work
you will have to make a decision about whether a table is the best way of presenting the data, or if
it would be easier to understand if you were to use a graph or chart.

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 This section of the guide identifies the appropriate uses of tables, and discusses some design
issues for constructing clear tables which are easy to interpret. The points covered in this guide
apply equally to primary data that you have collected yourself, and to data that you have found in
secondary sources and which you wish to include in your work. The latter may already be
presented as a table in the original work but you do not have to reproduce it exactly. It may be that
you only require an extract from the table to support your argument, or that the design of the table
could be improved, or that you wish to merge information from two different publications. There is
no problem in doing any of these as long as you ensure that you reference the original source of
the data in your table.

When to use tables

Tables are an effective way of presenting data:

 when you wish to show how a single category of information varies when measured at different
points (in time or space). For example, a table would be an appropriate way of showing how
the category unemployment rate varies between different countries in the EU (different points
in space);
 when the dataset contains relatively few numbers. This is because it is very hard for a reader
to assimilate and interpret many numbers in a table . In particular, avoid the use of complex
tables in talks and presentations when the audience will have a relatively short time to take in
the information and little or no opportunity to review it at a later stage;
 When the precise value is crucial to your argument and a graph would not convey the same
level of precision. For example, when it is important that the reader knows that the result was
2.48 and not 2.45;
 When you don’t wish the presence of one or two very high or low numbers to detract from the
message contained in the rest of the dataset. For example if you are presenting information
about the annual profits of an organisation and don’t want the underlying variability from one
year to the next to be swamped by a large loss in a particular year.

Table design
In order to ensure that your table is clear and easy to interpret there are a number of design issues
that need to be considered. These are listed below:

 Since tables consist of rows and columns of information it is important to consider how the data
are arranged between the two. Most people find it easier to identify patterns in numerical data by
reading down a column rather than across a row. This means that you should plan your row and
column categories to ensure that the patterns you wish to highlight are revealed in the columns. It

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 is also easier to interpret the data if they arranged according to their magnitude so there is
numerical progression down the columns, although this may not always be possible.

 If there are several columns or categories of information a table can appear complex and become
hard to read. It also becomes more difficult to list the data by magnitude since the order that
applies to one column may not be the same for others. In such cases you need to decide which
column contains the most important trend and this should be used to structure the table. If the
columns are equally important it is often better to include two or more simple tables rather than
using a single more complex one.

 Numbers in tables should be presented in their most simple format. This may mean rounding up
values to avoid the use of decimal places, stating the units (e.g. R4.6 million rather than
R4,600,000) or using scientific notation (e.g. 6.315 x 10-2 rather than 0.06315).

 All tables should be presented with a title that contains enough detail that a reader can understand
the content without needing to consult the accompanying text. There should also be information
about the source of the data being used; this may be a reference to a book or journal, or could
indicate that the data are results from an experiment carried out on a particular date.

 Where more than one table is being presented it is standard practice to give each one a unique
reference number, and in larger pieces of work, such as dissertations, a list of tables with their
page number is usually provided in addition to the contents page.

 The formatting of the table should not resemble a spreadsheet where each entry is bounded by a
box since this makes it difficult to read across rows or down columns. However, the design of the
table should help the reader interpret the data and so the use of lines and/or bold text to separate
headings from the body of data, or highlighting/shading specific rows or may be effective. Avoid
large gaps between columns since this also makes it difficult to read along a row.

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Examples of poor and better practice in the presentation of data in tables

Poor example

This is a poor example because:

 the table lacks a title

 the source of the information is not provided
 row titles straddle two lines
 each cell is bounded as if in a spreadsheet
 the alphabetical listing of regions results in a non-numerical ordering of data down the columns

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SECTION 2: CALCULATING AND REPRESENTING
DATA

Specific Outcome
Apply mathematical techniques to calculate and represent financial and
economic data.

Assessment Criteria
On completion of this section you will be able to:

 Averages and standard deviations are calculated using the data

collected. (SO 2, AC 1)
 The lines of best fit are calculated using the data collected. (SO 2,
AC 2)
 Calculations relating to the time value of money are performed for
different transactions. (SO 2, AC 3)
 Data collected and calculations are represented in a graphical
format. (SO 2, AC 4)

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2.1 INTRODUCTION

It is likely that there will be occasions when you have numerical information that you want to
include in your work, for example figures and other statistics from secondary sources (such as
books, journal articles or newspaper reports); the results of experiments; or data that you have
collected and analysed as part of a project or dissertation. Such information can be used to
illustrate an argument or convey complex or detailed information in a concise manner.

There are 2 main methods of presenting such information:

 it can be incorporated into the main body of text;

 it can be used to construct a graph or chart.

Determining which of these methods is the most appropriate depends upon the amount of data
you are dealing with and their complexity. The choice about whether to use text, tables or graphs
requires careful consideration if you are to ensure that your reader or audience understands your
argument and is not left struggling to interpret data that are poorly presented or in an inappropriate
format. It is crucial to remember that when using a table or graph the associated text should
describe what the data reveal about the topic; you should not need to describe the information
again in words.

Including numbers in the main body of text

Numbers are most effective in the main body of the text of an essay, report or dissertation when
there are only two values to compare.

For example:

86% of male students said they regularly ate breakfast compared to 62% of female students.

If you are discussing three or more numbers, including them within the main body of text does not
facilitate comprehension or comparison and it is often more useful to use a table incorporated
within the text.

For example:

53% of male students said that they always ate breakfast, 33% said that they usually did, and 14%
said that they never ate breakfast.

Is more clearly expressed as:

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Male students said they ate breakfast:

Always 53%

Usually 33%

Never 14%

In order to help the reader compare the numbers it is also useful to list them according to their
magnitude (e.g. from large to small) unless there is a particular pattern or trend in the data that you
want to highlight.

In general, numbers are usually given as digits rather than spelt out in the text, e.g. 400 rather
than four hundred. However, in some academic journals the convention is to spell out whole
numbers between one and ten and use values for all other numbers - so you may wish to find out
what the usual practice is within your own discipline.

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2.2 REPRESENTING DATA IN GRAPHICAL FORMAT (SO 2, AC 4)
Graphs are a good means of describing, exploring or summarising numerical data because the
use of a visual image can simplify complex information and help to highlight patterns and trends in
the data. They are a particularly effective way of presenting a large amount of data but can also be
used instead of a table to present smaller datasets. There are many different graph types to
choose from and a critical issue is to ensure that the graph type selected is the most appropriate
for the data. Having done this, it is then essential to ensure that the design and presentation of the
graph help the reader or audience interpret the data.

A summary of the types of data that can be presented in the most common types of graphs is
provided below and this is followed by some general guidelines for designing readily
understandable graphs.

2.2.1 GOOD GRAPH DESIGN

Although there are many different types of graph, there are a number of elements that are
common to the majority of them such as axes. This section provides some general guidelines to
help you design your graph and ensure that you apply these elements in a way that will help the
reader or audience interpret the data you are presenting.

Components of a graph
The different components of a graph are identified in the diagram on the next page and this is
followed by a description that highlights some of the specific design and presentation issues
related to each component.

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Chart area
The chart area defines the boundary of all the elements related to the graph including the plot itself
and any headings and explanatory text. It emphasises that these elements need to be considered
together and that they are separate from the surrounding text. The boundary of the chart area can
be imaginary rather than defined by a frame.

Plot area
The plot area is the region containing the data. It is bounded by the x- and y-axes to the bottom
and left side. The frame can be completed by drawing around the top and right sides too, but this
is not essential.

The x-axis
The x-axis is the horizontal line that defines the base of the plot area. Depending upon which type
of graph is being considered different locations on the x -axis represent either different categories
(such as years) or different positions along a numerical scale (such as temperature or income).
Details are placed just below the x-axis and an axis label is usually provided to clarify the units of
measurement. However, if the category details are mentioned somewhere else such as in the title
of the graph, or are very obvious (such as years) then it is not necessary to include an axis label.

The y-axis
The y-axis is the vertical line that usually defines the left side of the plot area, but if more than one
variable is being plotted on the graph then the vertical lines on both the left and right sides of the
plot area may be used as y-axes. The y-axis always has a numerical scale and is used to show
values such as counts, frequencies or percentages. Intervals on the scale are marked by numbers
and tick marks, indicating the major divisions, to the left of the y-axis. Like the x-axis, the y-axis
usually has a label that provides details of the units of measurement. The label is often written
vertically to follow the line of the y-axis but can instead be placed just above the top of the y-axis.
In order to best highlight a trend in the data, it may be necessary to start the y-axis scale at a point
other than zero. In such cases the starting value on the y-axis should be clearly labelled and the
readers’ attention drawn to the non-zero start by breaking the y-axis just below the first value as
shown in the example opposite.

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Gridlines
Gridlines are the vertical and horizontal lines placed within the plot area to help read values from
the graph. The gridlines should be subtle and not detract from the data. In the case of simple
graphs it is not always necessary to include them. Gridlines are usually drawn at regular intervals
based on the major divisions of the y-axis scale.

Title
All graphs should include a title that summarises what the graph shows. The title should identify
what is being described (e.g. speeding offences detected by automatic cameras) and the units of
measurements (e.g. percentages, total number, frequency). The title may be placed within the
chart area, as in the example above, or above or below the chart.

2.2.2 TYPES OF GRAPH

Bar charts
Bar charts are one of the most commonly used types of graph and are used to display and
compare the number, frequency or other measure (e.g. mean) for different discrete categories or
groups. The graph is constructed such that the heights or lengths of the different bars are
proportional to the size of the category they represent. Since the x-axis (the horizontal axis)
represents the different categories it has no scale. The y-axis (the vertical axis) does have a scale
and this indicates the units of measurement. The bars can be drawn either vertically or horizontally
depending upon the number of categories and length or complexity of the category labels. There
are various ways in which bar charts can be constructed and this makes them a very flexible chart

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type. For example, if there is more than one set of values for each category then grouped or
component bar charts can be used to display the data. Further details about each of these
different types of bar chart can be found in the associated study guide Bar Charts.

Histograms
Histograms are a special form of bar chart where the data represent continuous rather than
discrete categories. For example a histogram could be used to present details of the average
number of hours exercise carried out by people of different ages because age is a continuous
rather than a discrete category. However, because a continuous category may have a large
number of possible values the data are often grouped to reduce the number of data points. For
example, instead of drawing a bar for each individual age between 0 and 65, the data could be
grouped into a series of continuous age ranges such as 16-24, 25-34, 35-44 etc. Unlike a bar
chart, in a histogram both the x- and y-axes have a scale. This means that it is the area of the bar
that is proportional to the size of the category represented and not just its height Further
information on constructing histograms is available in the associated study guide Histograms.

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Pie charts
Pie charts are a visual way of displaying how the total data are distributed between different
categories. The example here shows the proportional distribution of visitors between different
types of tourist attractions. Similar uses of a pie chart would be to show the percentage of the total
votes received by each party in an election. Pie charts should only be used for displaying nominal
data (i.e. data that are classed into different categories). They are generally best for showing
information grouped into a small number of categories and are a graphical way of displaying data
that might otherwise be presented as a simple table. The study guide Pie Charts gives more
details about designing pie charts and using them to compare data.

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Source: Social Trends 30, Visits to the most popular tourist attractions, 1981, 1991 and 1998,
Tables 13.14, Crown Copyright.

Line graphs
Line graphs are usually used to show time series data – that is how one or more variables vary
over a continuous period of time. Typical examples of the types of data that can be presented
using line graphs are monthly rainfall and annual unemployment rates. Line graphs are particularly
useful for identifying patterns and trends in the data such as seasonal effects, large changes and
turning points. As well as time series data, line graphs can also be appropriate for displaying data
that are measured over other continuous variables such as distance. For example, a line graph
could be used to show how pollution levels vary with increasing distance from a source, or how the
level of a chemical varies with depth of soil. However, it is important to consider whether the data
have been collected at sufficiently regular intervals so that estimates made for a point lying half-
way along the line between two successive measurements would be reasonable. In a line graph
the x-axis represents the continuous variable (for example year or distance from the initial
measurement) whilst the y-axis has a scale and indicates the measurement. Several data series
can be plotted on the same line chart and this is particularly useful for analysing and comparing
the trends in different datasets.

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Let’s use an example to read and plot graphs.

Example:
You are at home getting ready to go out to your stamp collecting club. You leave your house and
jog the 1000m to the club. You arrive 5 minutes later. You exchange stamps and chat for 1 hour,
then leave for home. It takes you 10 minutes. Plot a distance time-graph to represent your journey
to and from the club.
Solution:
Drawing graphs of real-life problems
1. Choose a suitable scale for each axis
2. Decide how many points to plot.
3. Draw the graph with suitable accuracy
4. Provide a title and label the axis
The journey to and from my stamp collecting club

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Exercise

1. Identify the graph that matches each

of the following stories:
a. I had just left home when I
realized I had forgotten my
books so I went back to pick
them up.
b. Things went fine until I had a
flat tire.
c. I started out calmly, but sped
up when I realized I was
going to be late.

2. The graph at the right represents the typical day of a

teenager. Answer these questions:
a. What percent of the day is spent watching
TV?
b. How many hours are spent sleeping?
c. What activity takes up the least amount of
time?
d. What activity takes up a quarter of the day?
e. What two activities take up 50% of the day?

3. What two activities take up 25% of

the day?
Answer these questions about the graph at the right:
a. How many sets of data are represented?
b. On approximately what calendar date does the graph begin?
c. In what month does the graph reach its highest point?

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4. Answer these questions about
the graph on the right:
a. How many total miles
did the car travel?
b. What was the average
speed of the car for the
trip?
c. Describe the motion of
the car between hours
5 and 12?
d. What direction is
represented by line
CD?
e. How many miles were traveled in the first two hours of the trip?

5. Answer these questions about the graph at the right:

a. What is the dependent variable on this graph?
b. Does the price per bushel always increase with
demand?
c. What is the demand when the price is 5 per
bushel?
6. The bar graph at right represents the declared majors
of freshman enrolling at a university. Answer the
following questions:
a. What is the
total freshman
enrollment of
the college?
b. What percent
of the students
are majoring in physics?
c. How many students are
majoring in economics?
d. How many more students
major in polysci than in psych?
7. This f.graph represents
Which line the number of
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A's earned in a particular college algebra class. Answer the following questions:
a. How many A's were earned during the fall and spring of 1990?
b. How many more A's were earned in the fall of 1991 than in the spring of 1991?
c. In which year were the most A's earned?
d. In which semester were the most A's earned?
e. In which semester and year were the fewest A's earned?

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2.3 MEASURES OF CENTRAL TENDENCY AND STANDARD DEVIIATIONS (SO 2, AC 1)

Measures of central tendency, or "location", attempt to quantify what we mean when we think of as
the "typical" or "average" score in a data set. The concept is extremely important and we
encounter it frequently in daily life. For example, we often want to know before purchasing a car its
average distance per litre of petrol. Or before accepting a job, you might want to know what a
typical salary is for people in that position so you will know whether or not you are going to be paid
what you are worth. Or, if you are a smoker, you might often think about how many cigarettes you
smoke "on average" per day. Statistics geared toward measuring central tendency all focus on this
concept of "typical" or "average." As we will see, we often ask questions in psychological science
revolving around how groups differ from each other "on average". Answers to such a question tell
us a lot about the phenomenon or process we are studying.

2.3.1 MEAN, MEDIAN, MODE, AND RANGE

Mean, median, and mode are three kinds of "averages".

The "mean" is the "average" you're used to, where you add up all the numbers and then divide by
the number of numbers. The "median" is the "middle" value in the list of numbers. To find the
median, your numbers have to be listed in numerical order, so you may have to rewrite your list
first. The "mode" is the value that occurs most often. If no number is repeated, then there is no
mode for the list.

The "range" is just the difference between the largest and smallest values.

Example
Find the mean, median, mode, and range for the following list of values:
13, 18, 13, 14, 13, 16, 14, 21, 13
The mean is the usual average, so:
(13 + 18 + 13 + 14 + 13 + 16 + 14 + 21 + 13) ÷ 9 = 15

Note that the mean isn't a value from the original list. This is a common result. You should not
assume that your mean will be one of your original numbers.
The median is the middle value, so I'll have to rewrite the list in order:
13, 13, 13, 13, 14, 14, 16, 18, 21
There are nine numbers in the list, so the middle one will be the (9 + 1) ÷ 2 = 10 ÷ 2 = 5th number:
13, 13, 13, 13, 14, 14, 16, 18, 21
So the median is 14.
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The mode is the number that is repeated more often than any other, so 13 is the mode.
The largest value in the list is 21, and the smallest is 13, so the range is 21 – 13 = 8.
 Mean: 15
 Median: 14
 Mode: 13
 Range: 8

Note: The formula for the place to find the median is "( [the number of data points] + 1) ÷ 2", but
you don't have to use this formula. You can just count in from both ends of the list until you meet in
the middle, if you prefer. Either way will work.

Example 2
Find the mean, median, mode, and range for the following list of values:
1, 2, 4, 7
The mean is the usual average: (1 + 2 + 4 + 7) ÷ 4 = 14 ÷ 4 = 3.5

The median is the middle number. In this example, the numbers are already listed in numerical
order, so I don't have to rewrite the list. But there is no "middle" number, because there is an even
number of numbers. In this case, the median is the mean (the usual average) of the middle two
values: (2 + 4) ÷ 2 = 6 ÷ 2 = 3

The mode is the number that is repeated most often, but all the numbers appear only once. Then
there is no mode.

The largest value is 7, the smallest is 1, and their difference is 6, so the range is 6.
 Mean: 3.5
 Median: 3
 Mode: none
 Range: 6
The list values were whole numbers, but the mean was a decimal value. Getting a decimal value
for the mean (or for the median, if you have an even number of data points) is perfectly okay; don't
round your answers to try to match the format of the other numbers.

Example 3
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 Find the mean, median, mode, and range for the following list of values:
8, 9, 10, 10, 10, 11, 11, 11, 12, 13

The mean is the usual average:

(8 + 9 + 10 + 10 + 10 + 11 + 11 + 11 + 12 + 13) ÷ 10 = 105 ÷ 10 = 10.5

The median is the middle value. In a list of ten values, that will be the (10 + 1) ÷ 2 = 5.5th value;
that is, I'll need to average the fifth and sixth numbers to find the median:
(10 + 11) ÷ 2 = 21 ÷ 2 = 10.5

The mode is the number repeated most often. This list has two values that are repeated three
times.
The largest value is 13 and the smallest is 8, so the range is 13 – 8 = 5.
 mean: 10.5
 median: 10.5
 modes: 10 and 11
 range: 5
While unusual, it can happen that two of the averages (the mean and the median, in this case) will
have the same value.

Frequency table
A frequency table is the diagram that shows the number of times a particular incident took place.

Example:
In a learnership class, the following scores were achieved for an assessment of a
learning programme by the 15 learners in the class:

56% 29% 65% 74% 42%

38% 92% 43% 98% 23%

64% 81% 66% 68% 69%

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 xercise:
A student has gotten the following grades on his tests: 87, 95, 76, and 88. He wants an 85 or
better overall. What is the minimum grade he must get on the last test in order to achieve that
average?

2.3.2 THE STANDARD DEVIATION

The standard deviation is the most common measure of variability, measuring the spread of the
data set and the relationship of the mean to the rest of the data. If the data points are close to the
mean, indicating that the responses are fairly uniform, then the standard deviation will be small.
Conversely, if many data points are far from the mean, indicating that there is a wide variance in
the responses, then the standard deviation will be large. If all the data values are equal, then the
standard deviation will be zero. The standard deviation is calculated using the following formula.

Example: To find the Standard deviation of the data set: 3,2,4,1,4,4.

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NB
If the data points are close to the mean, indicating that the responses are fairly uniform, then the
standard deviation will be small. Conversely, if many data points are far from the mean, indicating
that there is a wide variance in the responses, then the standard deviation will be large. However,
the standard deviation alone is not particularly useful without a context within which one can
determine meaning. A standard deviation of 1.265 with a mean of 3, as calculated in our example,
is much different than a standard deviation of 1.265 with a mean of 12. By calculating how the
standard deviation relates to the mean, otherwise known as the coefficient of variation (CV), you
will have a more uniform method of determining the relevance of the standard deviation and what
it indicates about the responses of your sample. The closer the CV is to 0, the greater the
uniformity of data. The closer the CV is to 1, the greater the variability of the data.

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2.4 CALCULATING LINES OF BEST FIT (SO 2, AC 2)

A line of best fit is a straight line that is the best approximation of the given set of data. It is used
to study the nature of the relation between two variables.

A line of best fit can be roughly determined using an eyeball method by drawing a straight line on
a scatter plot so that the number of points above the line and below the line is about equal (and
the line passes through as many points as possible).

A more accurate way of finding the line of best fit is the least square method.

Use the following steps to find the equation of line of best fit for a set of ordered pairs (x1, y1),
(x2, y2), ..., (xn,yn).

Step 1: Calculate the mean of the x-values and the mean of the y-values.

Step 2: The following formula gives the slope of the line of best fit:

Step 3: Compute the y-intercept of the line by using the formula:

Step 4: Use the slope m and the y-intercept b to form the equation of the line.

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Example:

Use the least square method to determine the equation of line of best fit for the data. Then plot the
line.

Solution:

Plot the points on a coordinate plane.

Calculate the means of the x-values and the y-values.

Now calculate , , , and for each i.

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Calculate the slope.

Calculate the y-intercept.

Use the formula to compute the y-intercept.

Use the slope and y-intercept to form the equation of the line of best fit.

The slope of the line is –1.1 and the y -intercept is 14.0.

Therefore, the equation is y = –1.1 x + 14.0.

Draw the line on the scatter plot.

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2.5 CALCULATING TIME VALUE OF MONEY (SO 2, AC 3)

Single Sum.

Time Value of Money: Know this terminology and notation

FV Future Value (1+i)t Future Value Interest Factor [FVIF]

PV Present Value 1/(1+i)t Present Value Interest Factor [PVIF]

i Rate per period

t # of time periods

Question: Why are (1+i) and (1+i)t called interest factors?

Answer: 1. Start with simple arithmetic problem on interest:

How much willR10,000 placed in a bank account paying 5% per year be worth compounded
annually?

Answer: Principal + Interest

R10,000 +R10,000 x .05 =R10,500

2. Factor out theR10,000.

10,000 x (1.05) =R10,500

3. This leaves (1.05) as the factor.

1. Find the value ofR10,000 earning 5% interest per year after two years.
Start with the amount after one year and multiply by the factor for each year.
[Amount after one year] x (1.05)
= [R10,000 x (1.05)] x (1.05)
= R10,000 x (1.05)2
= R11,025.

.
So (1+i)t = (1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)… ·(1+i) for “t” times

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A. Future Value

Find the value ofR10,000 in 10 years. The investment earns 5% per year.

FV =R10,000·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)
FV =R10,000·(1.05)·(1.05)·(1.05)·(1.05)·(1.05)·(1.05)·(1.05)·(1.05)·(1.05)·(1.05)
FV =R10,000 x (1.05)10
=R10,000 x 1.62889
=R16,289

Find the value ofR10,000 in 10 years. The investment earns 8% for four years and then
earns 4% for the remaining six years.
FV =R10,000·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)
FV =R10,000·(1.08)·(1.08)·(1.08)·(1.08)·(1.04)·(1.04)·(1.04)·(1.04)·(1.04)·(1.04)
FV =R10,000 x (1.08)4 x (1.04)6
FV =R17,214.53

Present Value:
Same idea, but begin at the end. Rearrange the Future value equation to look like this:

PV = FV÷ [(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)]
PV = FV ÷ (1+i)t [2]

Example: How much do I need to invest at 8% per year, in order to haveR10,000 in__.
a. One year: PV =10,000 ÷ (1.08) = R9,259.26
b. Two years: PV =R10,000 ÷ (1.08) ÷ (1.08)
OR R10,000 ÷ (1.08)2 =R8,573
c. Ten years PV =R10,000 ÷ (1.08)10 = R10,000 ÷ 2.1589 = R4,632

Rate of Return

START WITH SAME RELATIONHSIP: FV = PV x (1+i)t

Solve for i.
(1+i)t =FV/PV.
1+i = (FV/PV)1/t
i = (FV/PV)1/t-1.
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Question: An investor depositsR10,000. Ten years later it is worthR17,910. What rate of return
did the investor earn on the investment?
Solution:
R17,910 =R10,000 x (1+i)10
(1+i)10 =R17,910/10,000 = 1.7910
(1+i) = (1.7910) 1/10 = 1.060
i = .060 = 6.0%

Finding the Future Value

Find the value ofR10,000 today at the end of 10 periods at 5% per period.

1. Scientific Calculator:
KEY Use [yx] y = (1+i) = 1.05 and x =t= 10.
RELATIONHSIP:
1. Enter 1.05.
2. Press [yx].
FV = PV x (1+i)t 3. Enter the exponent.
4. Enter [=].
5. Multiply result byR10,000.

2. Spreadsheet:

3. Financial calculator. You may need to input something like this.

Specific functions vary. Be sure to consult the calculator’s manual!!!!!!

n [N] i [I/YR] PV PMT FV

10 5 10,000 0 ?

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NOTE: The future value will be negative, indicate an opposite direction of cash flow.

1. Set the calculator frequency to once per period.

2. Enter negative numbers using the [+/-] key, not the subtraction key.
3. Be sure the calculator is set in the END mode.

Fundamental Idea.
Question: What is the value of any financial asset?
Answer: The present value of its expected cash flows.

Finding the Present Value

Find the present value ofR10,000 to be received at the end of 10 periods at 8% per period.

Scientific Calculator

Scientific Calculator:
KEY Use [yx ] where y = 1.08 and x = -1,-2, or -10.
RELATIONHSIP
1. Enter 1.08.
:
2. Press [yx]

PV = FV ÷ 3. Enter the exponent as a negative number

4. Enter [=].
5. Multiply result byR10,000.

Spreadsheet

Financial calculator. You may need to input something like this.

Specific functions vary. Be sure to consult the calculators’ manual!!!!!!

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 n [N] i [I/YR] PV PMT FV

c. 10 8 10,000 0 ?

The present value will be negative, to indicate the opposite direction of cash flow.

FUTURE VALUE WHEN RATES OF INTEREST CHANGE.

FV = PV x (1+i1) x (1+i2) x (1+i3) x … x

Example:
You investR10,000. During the first year the investment earned 20% for the year.
During the second year, you earned only 4% for that year. How much is your
original deposit worth at the end of the two years?

FV = PV x (1+i1) x (1+i2)
=R10,000 x (1.20`) x (1.04) =R12,480.

Question:
The arithmetric average rate of return is 12%, what is the geometric average rate of return?

Answer:
An average rate of return is a geometric average since it is a rate of growth. The
12% is the arithmetic average. The geometric average rate of return on the
investment was 11.7%.
i = (FV/PV)1/t-1 = (12,480/10000)1/2-1 = .1171

OR i=√(1.20)⋅(1.04)−1=0.1171

Important: Although 20% and 4% average to 12%, theR10,000 not grow by 12%.
[R10,000 x (1.12)2= 12,544 NOTR12,480].

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COMPOUNDING PERIODS
Up to this point, we have used years as the only time period. Actually, all the previous examples
could have been quarters, months, or days.
The interest rate and time period must correspond.

Example:

Problem 1.
Find the value of R10,000 earning 5% interest per year after two years.

Problem 2.
Find the value of R10,000 earning 5% interest per quarter after two quarters.

Both problems have same answer

R10,000 x (1.05)2 =R11,025.
However:
In the first problem t refers to years and i refers to interest rate per year.
In the second problem t refer to quarters and i to interest rate per quarter.

FVt = PV x (1+i)t.
t = number of periods
i = interest for the period.

Alternatively,

FVtm = PV x (1+i/m)tm.

m= periods per year,

t= number of years,
i = the interest per year [APR].

Example:
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What willR1,000 be worth at the end of one year when the annual interest rate is 12% [This is the
APR.] when interest is compounded:

Annually: t=1 i =12% FV1 = PV x (1+i)1 =R1,000 x (1.12)1 = R1,120.

Quarterly: t=4 i = 3% FV4 = PV x (1+i)4 = R1,000 x (1.03)4 =R1,125.51.
Monthly: t=12 i =1% FV12 =R1,000 x (1.01)12 =R1,000 x (1.126825) = R1,126.825.

Daily: t=365 i = (12%÷365) = 0.032877%

FV365 =R1,000 x (1.00032877)365=R1,000 x (1.12747) =R1,127.47.

n [N] i [I/YR] PV PMT FV

1 12 1,000 0 ?

4 3 1,000 0 ?

12 1 1,000 0 ?

365 .032877 1,000 0 ?

How about compounding at every instant?

E. CONTINUOUS COMPOUNDING:

[Used in Black Scholes option pricing model.]

t·m
lim 1 + __i__ = eit
m  m

Example: What isR1,000 worth in one year if compounded at 12% continuously?

FV =R1,000 x e.12
= R1,000 x 1.127497 = R1,127.50

This is R.03 more than daily compounding.

Try this on your calculator. Find the ex button. e.12 = 1.12749

Present Value Interest Factor = [e -i t]
Problem: What is the present value ofR10,000 to be received 3 years from today compounded
continuously at 10%?PV =R10,000 x e -.10 x 3 =R10,000 x 0.74082=R7,408
Try this on your calculator. Find the ex button. e-0.3 = 0.74082

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SECTION 3: MATHEMATICAL ANALYSIS TO
INDICATE ECONOMIC RELATIONSHIPS

Specific Outcome
Apply mathematical analysis to indicate economic relationships.

Assessment Criteria
On completion of this section you will be able to:

 Economic relationships are indicated through graphical

representation techniques. (SO 3, AC 1)
 Graphical representations and numerical summaries are consistent
with the data, are clear and appropriate to the situation. (SO 3, AC
2)
 Projections are made on the basis of mathematical analysis. (SO 3,
AC 3)

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3.1 INTRODUCTION

Graphs represent quantity as a distance on a line. On a graph, the horizontal scale line is the x-
axis, the vertical scale line is the y-axis, and the intersection of the two scale lines is the origin.

The three main types of economic graphs are:

 Time-series graphs demonstrate the relationship between time, measured on the x-axis,
and other variable(s), measured on the y-axis. Time-series graphs show the variable’s
level, direction of change, speed of change, and trend, which is its general tendency to rise
or fall.
 Cross-section graphs show the values of a variable for different groups in a population at a
point in time.
 Scatter diagrams plot the value of one variable against the value of another to show the
relationship between two variables.

Such a relationship indicates how the variables are correlated, not whether one variable causes
the other.

Graphs Used in Economic Models

The four important relationships between variables are:
 Positive relationship or direct relationship — the variables move together in the same
direction, as illustrated in Figure. The relationship is upward-sloping.
 Negative relationship or inverse relationship — the variables move in opposite directions,
as shown in Figure. The relationship is downward sloping.

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3.2 THE SLOPE OF A RELATIONSHIP (SO 3, AC 1, AC 2, AC 3)
The slope of a relationship is the change in the value of the variable on the y-axis divided by the
change in the value of the variable on the x-axis.
The formula for slope is ∆y/∆x, with ∆ meaning “change in.” A straight line (or linear relationship)
has a constant slope. A curved line has a varying slope, which can be calculated two ways:
 Slope at a point — by drawing the straight line tangent to the curve at that point and then
calculating the slope of the line.
 Slope across an arc — by drawing a straight line across the two points on the curve and
then calculating the slope of the line.

Graphing Relationships among More Than Two Variables

Relationships between more than two variables can be graphed by holding constant the values of
all the variables except two (the ceteris paribus assumption, that is, “other things remaining the
same”) and then graphing the relationship between the two with, ceteris paribus, only the variables
being studied changing. When one of the variables not illustrated in the figure changes, the entire
relationship between the two that have been graphed shifts.

IMPORTANCE OF GRAPHS AND GRAPHICAL ANALYSIS:

Economists almost always use graphs to present relationships between variables. This fact should
not “scare” you nor give you pause. Economists do so because graphs simplify the analysis. All
the key concepts you need to master are presented in this appendix. If your experience with
graphical analysis is limited, this appendix is crucial to your ability to readily understand economic
analysis. However, if you are experienced in constructing and using graphs, this appendix may be
“old hat.”

CALCULATING THE SLOPE:

Often the slopes of various relationships are important. Usually what is key is the sign of the slope
— whether the slope is positive or negative — rather than the actual value of the slope. An easy
way to remember the formula for slope is to think of it as the “rise over the run,” a saying used by
carpenters and others. As illustrated in Figure, the rise is the change in the variable measured on
the vertical axis, or in terms of symbols, ∆y. The run is the change in the variable measured on the
horizontal axis, or ∆x. This “rise over the run” formula also makes it easy to remember whether the
slope is positive or negative. If the rise is actually a drop, as shown in Figure, then the slope is
negative because when the variable measured on the horizontal axis increases, the variable
measured on the vertical axis decreases. However, if the rise actually is an increase, then the
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slope is positive. In this case, an increase in the variable measured on the x-axis is associated
with an increase in the variable measured on the y-axis.

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