QUANTITATIVE

TECHNIQUES A
COQT111
Robbie Stewart

Chapter 1 Statistics in Management

Prescribed sections 1.1 – 1.9 not 1.4 p 2 - 17

1
 1.1 Introduction
• Management Decision Making
➢Statistics is used by managers to assist them in their
decision making. Statistics forms a “management decision
support system”.

• Information versus Data

Information must be: Data is:
Timely; Readily available;
Accurate; Consist of individual values;
Relevant; Of little use in its raw form.
Adequate;
Easily accessible

• What is Statistics?
➢Statistics can be defined as the science of collecting,
organising, analysing and interpreting data in order to
make decisions

• The Statistical Cycle

The three key components in identifying problems are:
➢ Think systematically;
➢ Look for connections and relationships;
➢ Understand why data values differ from one another
4

2
5

1.2 The language of statistics

➢A random variable is an item of interest on which data is

collected and analysed
➢Data is the values or outcomes recorded on a random
variable
➢A sampling unit is the object being measured, counted or
observed with respect to the random variable
➢A population is a set of all objects or individuals of interest
from which a sample can be drawn
➢A population parameter describes a characteristic of a
population
➢A sample is a subset of data values drawn from a
population

3
 • The language of statistics continued
➢A sample statistic describes a characteristic of a sample

1.3 Components of Statistics

➢Descriptive statistics summarises sample data into a few
measures
➢Inferential statistics generalises sample findings to the
broader population
➢Statistical modelling builds models of relationships
between random variables

4
 1.5 Statistical Applications in Management
➢Finance
➢Marketing
➢Human Resources
➢Operations and Logistics

1.6 Data and Data Quality

➢Data is the raw material of statistical analysis
➢Data quality is influenced by:
✓ Data quality, data source, the method of data collection
and appropriate data preparation

➢ Selection of the Statistical Method depends on:

✓ The management problem to be addressed
✓ The type of data available
9

1.7 Data Types and Measurement Scales

➢Qualitative random variables

✓ Data has categorical responses that have no numerical
value
✓ Only the number of responses per category can be
counted

➢Quanitative random variables

✓ Data has numerical values
✓ Numeric data can be further classified as discrete or
continuous

10

5
 • Types of Data

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•Quantitative Random Data

➢Discrete data
✓ Data is whole numbers (integers)
✓ Cannot be fractions or decimals
✓ e.g. - Number of students in a class

➢Continuous data
✓ Data can take on any numerical value
✓ Can be fractions or decimals
✓ e.g. – The distanced a student travels to campus in
kilometres

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6
 • Measurement scales
➢Nominal data is the weakest form of data to analyse, has
no numerical properties, no specific order and is
associated with categorical data e.g. male, female
➢Ordinal data is also associated with categorical data but
has an implied ranking, is a stronger than nominal data and
each consecutive category possesses either more or less
than the previous category e.g. small, medium, large
➢Interval data is also associated with numeric data and
quantitative random variables
➢Ratio data consists of real numbers associated with
quantitative random variables, has all the properties of
numbers and is the strongest data for statistical analysis

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15

1.8 Data sources

➢Internal data is sourced from within a company
➢External data is sourced from outside an organisation
➢Primary data is data that is recorded for the first time at
source and with a specific purpose in mind. The main
advantage is it is high quality data with both relevance and
accuracy. The main disadvantage is that it can be time
consuming and expensive to collect
➢Secondary data is data that already exists in a processed
format. The main advantages are that it is less time
consuming and cheaper to collect. The main disadvantages
are that it may be less relevant, out of date, difficult to
assess data accuracy, it may not be possible to manipulate
the data further and by using different data sources the
data may become distorted and biased

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8
 1.9 Data Collection Methods

➢Data collection includes observation, surveys and

experimentation

➢Observation is a method to collect primary data.

✓ The advantage of observation is that the respondent is
unaware they are being observed and thus behaves more
naturally thus reducing the likelihood of collecting biased
data.
✓ The disadvantage of observation is that as this is a passive
form of data collection there is no opportunity to
investigate further.

17

• Data Collection Methods (cont)

➢Surveys are a method to collect primary data through

direct questioning using questionnaires.

➢Surveys capture mainly attitudinal-type data

➢Surveys are conducted through personal interviews,

telephone surveys or e-surveys

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9
 ➢ A personal interview is a face to face questionnaire:

✓ Advantages of a personal interviews include:

❖ Higher response rates
❖ Allows for reasons to be identified
❖ Data is current and more accurate
❖ Allows for questioning of a technical nature
❖ Non-verbal responses can be noted
❖ More questions can be asked
❖ The use of aided–recall questions and other prompts is
possible

✓ Disadvantages of a personal interviews include:

❖ Time consuming
❖ Expensive
19

➢ Telephone interviews are often used for snap (straw)

surveys:

✓ Advantages of a telephone interviews include:

❖ Data is current and more geographically dispersed
❖ Call backs are possible
❖ Relatively low cost
❖ People are often more willing to talk
❖ Interviewer probing is possible
❖ Questions can be clarified
❖ The use of aided–recall questions is possible
❖ A larger sample of respondents can be reached

20

10
 ✓ Disadvantages of a telephone interviews include:
❖ Lack of anonymity
❖ Non-verbal responses cannot be observed
❖ Trained interviewers are required which increases costs
❖ Interviewer bias can occur
❖ Data can be lost if the respondent puts down the phone
❖ Sampling bias can occur as only people with phones can
be interviewed

21

➢ E-surveys are increasingly popular because:

✓ The process is automated eliminating data capture errors
✓ Cheaper and faster
✓ Local, national and international respondents can be
reached
✓ Data is current and accurate

✓ Advantages of e-surveys over personal interviews include:

❖ Interviewer bias is eliminated
❖ Respondents have more time
❖ Respondent anonymity is assured

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11
 ✓ Disadvantages of e-surveys over personal interviews
include:
❖ Limited sampling frames
❖ Sampling bias can occur as only people with email,
internet access or mobile phones can respond

✓ Disadvantages of e-surveys over traditional postal surveys

include:
❖ Lack of personal communication leads to less control over
the data collection process
❖ Low response rates
❖ The respondent cannot clarify questions
❖ Survey questions need to be short and simple
❖ Limited opportunity to investigate further
❖ Bias can occur as there is no way to control who answers
the questions
23

➢ Experimentation is used to obtain primary data

➢ Examples of experimentation include:
✓ Price manipulation
✓ Altering machine settings to examine the effects on
product quality

✓ Advantages of experimentation include:

❖ High quality
❖ Data is likely to be accurate and “noise-free”
❖ Data is more reliable and valid than surveys

✓ Disadvantages of experimentation include:

❖ Costly and time consuming
❖ Controlling external factors may confound the results

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 Chapter 2 Summarising Data
Prescribed sections 2.1 – 2.3 p 26 – 42
Do not study Stacked Bar Charts, Multiple Bar Charts, Histograms, Box Plot, Trendline
Graphs, Lorenz Curve and Pareto Curve.

25

2.1 Introduction p27

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 2.2 Summarising Categorical Data
• Single Categorical Variable
– To construct a categorical frequency table
➢ List the categorical variables (column 1)
➢ Count the number of occurrences (column 2)
➢ For a percentage frequency table convert the count to a
percentage (column 3)

27

– To construct a bar chart

➢ List the categorical variables on the horizontal axis
➢ Scale the vertical axis to the counts (or percentage)
➢ Draw the bars to the height of the count (or percentage)

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 – To construct a pie chart
➢ Divide a circle into categorical segments
➢ The size of each segment must be equal to of the count
(or percentage) of its category
➢ The sum of the segments must be equal to the sample size
(or 100%)

29

2.3 Summarising Numeric Data (p35)

– Frequency tabulated (grouped) data

30

15
 2.3 Summarising Numeric Data (p35)
– Numeric frequency distribution summarises data into
intervals of equal width. (Grouped data)
➢ Step 1: Determine the data range

➢ Step 2: Choose the number of intervals (between 5

and 8)
➢ Step 3: Determine the interval width

➢ Step 4: Set the interval limits – The lower limit should

be lower than the minimum value. The lower limit for
each interval is found by adding the interval width to
each preceding lower limit.
31

➢ Step 5: Draw a table and assign to ONE of the

intervals. If data is continuous the upper limit of
each interval should be < the lower limit of the next
intervals lower limit. If data is discrete the whole
number one less than the next intervals lower limit
must be used

70 −20
– Interval width = = 10
5

32

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 • Cumulative Frequency Distribution (p38)
– A cumulative frequency distribution is a summary
table of cumulative frequency counts and is used to
answer questions of a less than or greater than nature
➢ Step 1: Using the numeric frequency distribution add
an extra interval below the first interval (the
frequency for this interval should be zero (0))
➢ Step 2: Count the number of variables that fall below
(or equal to) the maximum value of each interval
➢ Alternatively add the frequencies of each interval
below the maximum value of the current interval
together or the current intervals frequency to the
cumulative frequency of the previous interval.
➢ Step 3: Check that the value of the cumulative
frequency of the last interval is equal to the sample
size.
33

Cummulative frequency distribution table

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 • Ogive (p39)
– An Ogive is a graph of the cumulative frequency
distribution. To construct an Ogive:
➢ Step 1: On the x axis mark the interval limits.
➢ Step 2: On the y axis plot the cumulative frequency
against the upper limit of the interval.
➢ Step 3: Join the cumulative frequency points with a
line graph

35

Ogive – a graph of a cummulative frequency

distribution

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 Chapter 3 Describing Data: Numeric Descriptive
Statistics
Prescribed sections 3.1 – 3.5, 3.8 & 3.10 p 66 – 87, 91
& 93 - 94
Do not study Geometric mean on p73.

37

3.1 Introduction (p66)

• Three characteristics are commonly used

✓ Measures of central and non-central location
✓ Measures of dispersion
✓ Measures of skewness

38

19
 Using your Casio fx82 to calculate measures
• Ungrouped Data is data that is given as individual data points
• Ungrouped data has no frequency distribution
• On your Casio fx82 calculator you must setup the Stats Mode to
frequency OFF for ungrouped data
✓ Press Shift ; Setup ; down arrow ; 3 (STAT) ; 2 (OFF)
✓ Press Mode ; 2 (STAT) ; 1 (1-VAR)

• Grouped Data is numeric data that is summarized into intervals of

equal width showing how many data values (frequency (f)) fall
within that interval.
• On your Casio fx82 calculator you must setup the Stats Mode to
frequency ON for grouped data
✓ Press Shift ; Setup ; down arrow ; 3 (STAT) ; 1 (ON)
✓ Press Mode ; 2 (STAT) ; 1 (1-VAR)
39

3.2 Central Location Measures p67

– Arithmetic Mean (Average)
ALWAYS SHOW
ALL YOUR
WORKINGS

✓On your calculator choose Option 3:Sum ; Option 2:Σx (Σx = 376)
✓ n = Option 4:Var ; Option 1:n (n = 20)
UNGROUPED DATA
376
✓ x̄ = = 18.8
20
✓ Check your answer x̄ = Option 4:Var ; Option 2: x̄ = 18.8

40

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 • Central Location Measures GROUPED DATA

– Arithmetic Mean (Average)

➢ σ 𝑥 = 1130
➢ 𝑛 = 30
1130
➢ 𝑥ҧ = = 37.67 minutes
30

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• Central Location Measures UNGROUPED DATA

– Median (middle number) p68

➢ sequence in ascending order
13 15 15 16 18 18 18 18 18 19
20 20 20 20 20 20 21 21 22 24

➢ select average of 2 middle numbers if n is an

even number (median = (19+20)÷2 = 19.5)
➢ select middle number if n is an odd number

– Mode (Most frequently occurring) p70

➢ Mode = 20 as it occurs six times
42

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 • Central Location Measures GROUPED DATA

– Median (Me)

➢ Ome is the opening value of the class in which the

median occurs
➢ c is the class width
➢ f(<) is the cumulative frequency of all classes below
the class in which the median occurs
➢ fme is the frequency of the class in which the median
occurs

43

• Central Location Measures (p69) GROUPED DATA

– Median (Me)

➢ Ome is the opening value of the class in which variable

𝑛
occurs that is where the 15th data point occurs = 30
2
➢ c is the class width = 10
➢ f(<) is the cumulative frequency of all classes below
the class in which the median occurs = 8
➢ fme is the frequency of the class in which the median
occurs = 9

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 • Central Location Measures GROUPED DATA

– Median (Me)

30
10[ − 8]
➢ 𝑀𝑒 = 30 + 2
= 30 + 7.78 = 37.78 minutes
9
➢ The median courier delivery time is 37.78 minutes

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• Central Location Measures GROUPED DATA

– Mode (MO) (p70)

➢ Omo is the opening value of the class with the highest

frequency occurs = 30
➢ c is the class width = 10
➢ fm is the frequency of the class in which the mode
occurs = 9
➢ fm-1 is the frequency of the class 1 below the class in
which the mode occurs = 5
➢ fm+1 is the frequency of the class 1 above the class in
which the mode occurs = 7
46

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 • Central Location Measures GROUPED DATA

– Mode (MO)

10(9 −5)
➢ 𝑀𝑜 = 30 + = 30 + 6.67 = 36.67 minutes
2×9 − 5 −7
➢ The mode for courier delivery time is 36.67 minutes

47

• Advantages and Disadvantages of Different

Measures of Central Location

– Advantages of the Arithmetic Mean (p 67)

➢ Uses all data values in the calculation
➢ It is an unbiased statistic
– Disadvantages of the Arithmetic Mean (p 67)
➢ It is not appropriate for categorical data
➢ It is distorted by outliers

– Advantage of the Median (p 70)

➢ It is not distorted by outliers
– Disadvantage of the Median (p 70)
➢ It is not appropriate for categorical data
48

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 • Advantages and Disadvantages of Different
Measures of Central Location

– Advantages of the Mode (p 72)

➢ It is an appropriate measure for all data types
including categorical data
➢ It is not distorted by outliers

– Disadvantages of the Mode (p 72)

➢ It is only appropriate if there is only one variable
with a highest occurrence (unimodal)

49

• Which measure of Central Location is best? (p72)

– The best measure of central location depends on:

➢ Data type. If data is categorical only the mode can
be used but if data is numeric all three measures,
the mean, the median and the mode can be used.
➢ Outliers. If outliers exist the Median (or mode)
should be used but the median is preferred to the
mode for numeric data as it can be used for further
analysis.

50

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 – The data below represents the prices
of different vehicle types sold by a
dealer. Calculate the:
➢ Mean,
➢ Median and
➢ Mode

51

3.3 Non-central Location Measures (p74 – 78)

– Quartiles

UNGROUPED DATA

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 UNGROUPED DATA

Step 1: Determine Quartile position as:

(n + 1) 1 20 + 1
Q1 = = (n + 1) 𝑄1 = = 5.25
4 4 4
3(n + 1) 3 3(20 + 1)
Q3 = = (n + 1) 𝑄3 =
4
= 15.75
4 4

Step 2: Quartile value = count the whole number in the

Quartile position to the approx quartile value + faction part of
quartile position x (consecutive value after quartile position -
approx quartile value)
Q1 = 40 + 0.25 x (43 – 40) = 40.75 KwH
Q3 = 51 + 0.75 x (55 – 51) = 54 KwH
53

UNGROUPED DATA

• Percentiles
Step 1: Determine Percentile position as:
20(n + 1) 20
P20 = = (n + 1)
100 100

60(n + 1) 60
P60 = = (n + 1)
100 100

Step 2: Determine Percentile value as:

Percentile value = approx percentile value + faction part of
percentile position x (consecutive value after percentile
position - approx percentile value)

54

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 UNGROUPED DATA

– Step 1: Determine the Percentile position

20 20
P20 = (n + 1) P20 = (20 + 1) = 4.2
100 100

60 60
P60 = ( n) P60 = (20 + 1) = 12.6
100 100

– Step 2: Determine the Percentile value

P20 = 38 + 0.2 x (40 – 38) = 38.4 KwH
P60 = 48 + 0.6 x (50 – 48) = 49.2 KwH
55

GROUPED DATA

Step 1: Determine quartile position as:

1 3
𝑄1 = (𝑛) 𝑄3 = (𝑛)
4 4
1 3
𝑄1 = 30 = position 7.5 𝑄3 = 30 = position 22.5
4 4

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 GROUPED DATA
Step 2: Determine quartile value as:

 1  
10   30  − 3 
4  
Q1 = 20 +  = 20 + 9 = 29
5

 3  
10   30  − 17 
4 
Q3 = 40 +   = 40 + 55 = 47.86
7 7

57

GROUPED DATA
• Percentiles

Step 1: Determine percentile position as:

20 60
𝑃20 = (𝑛) 𝑃60 = (𝑛)
100 100
1 𝑃60 = 0.6 × 30 = position 18
𝑃20 = 30 = position 6
5
58

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 • Percentiles (continued) GROUPED DATA

Step 2: Determine percentile value as:

 20   60 
c n − f ()  c n − f () 
+   +  
100 100
P20 = OP20 P60 = OP60
f P20 f P60

20 60
10 100 × 30 − 3 10 100 × 30 − 17
𝑃20 = 20 + 𝑃60 = 40 +
5 7
30 10
𝑃20 = 20 + = 26 𝑃60 = 40 + = 41.43
5 7

59

The data below represents the prices of

different vehicle types sold by a dealer.

Calculate the:
➢ 1st Quartile,
➢ 3rd Quartile,
➢ 20th Percentile
➢ 90th Percentile

60

30
 1st Quartile
𝑛
Car Prices n = 160 ∴ = 40
4
Price (R000) f F 160
25[ −31]
50 < 75 4 4 𝑄1 = 125 + 4
=
24
75 < 100 10 14 125 + 9.375 = 134.375
100 < 125 17 31
The 1st Quartile car price is
125 < 150 24 55 R134,375.00
150 < 175 32 87
175 < 200 29 116 3rd Quartile
3𝑛
200 < 225 20 136 n = 160 ∴ = 120
4
225 < 250 15 151 3×160
25[ −116]
250 < 275 7 158 𝑄1 = 200 + 4
=
20
275 < 300 2 160
200 + 5 = 205
160
The 3rd Quartile car price is
R205,000.00
61

20th Percentile
Car Prices n = 160 ∴ 0.2 × 𝑛 = 32
Price (R000) f F 𝑄1 = 125 +
25[32 −31]
=
24
50 < 75 4 4
125 + 1.04167 = 126.04167
75 < 100 10 14
100 < 125 17 31 The 20th Percentile car price
is R126,041.67
125 < 150 24 55
150 < 175 32 87
175 < 200 29 116 90th Percentile
200 < 225 20 136 n = 160 ∴ 0.9 × 𝑛 = 144
225 < 250 15 151 25[144−136]
𝑄1 = 225 + =
15
250 < 275 7 158 225 + 13.33333 = 238.33333
275 < 300 2 160
The 90th Percentile car price
160 is R238,333.33

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 3.4 Measures of Dispersion (p79)
Dispersion refers to the extent to which data values are scattered
around their central location value

✓ Dispersion influences the degree of confidence a user has in

the reliability of their measure of central location
✓ The greater the dispersion the less confidence and the lower
the reliability of the measure of central location

63

– Range (p79)

✓ On your calculator choose option 5:Minmax

✓ Range = Option 2:Max – Option 1:Min (61 – 33 = 28 kWh)

64

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 – Variance (s2) (p80)
ALWAYS SHOW
ALL YOUR
WORKINGS

✓ Use the STAT mode of your calculator to find the different

variables
938
✓x̄ = = 46.9 ; Σx2 = 45276 ; n = 20
20
45276 − 20 × 46.92
✓𝑠 2 = = 67.57
20−1
✓The variance of electricity usage is 67.57 kWh
65

– Standard Deviation (s) (p81)

✓ The Standard deviation (s) is the square root of the variance
✓ It is possible to calculate the Standard Deviation using the
formula:

✓ This formula is not always provided in the formula sheet so it is

easier to first calculate the Variance and then calculate the
square root of the variance to get the Standard Deviation.
45276 − 20 × 46.92
✓ Where 𝑠 2 = = 67.57 ALWAYS SHOW
20−1

✓ 𝑠 = 67.57 = 8.22 ALL YOUR

WORKINGS
✓ The value of s can be confirmed by looking it up on your
calculator but if you only write down the answer without
showing your workings you will loose most of the marks
66

33
 – What is the Standard Deviation used for?
✓ The Standard deviation (s) determines the degree of
confidence that any data point has to the mean
✓ Where the data variables are normally distributed (bell
shaped) 68.3% of the data will fall within 1 Standard
Deviation of the mean; 95.5% of the data will fall within 2
Standard Deviations of the mean and 99.7% of the data will
fall within 3 Standard Deviations of the mean.

67

– Coefficient of Variation (cv) (p83)

✓ The Coefficient of Variation (cv) expresses the variability of

data in relation to the mean - as a percentage
✓ Expressing dispersion as a percentage makes it possible to
compare the variability of different samples.
✓ The smaller the Coefficient of Variation the more
concentrated the data is about its mean.

68

34
 – Coefficient of Variation (cv) (p83)

16.4
✓ cv(mass) = × 100 = 21.03%
78
20.1
✓ cv(height) = 166 × 100 = 12.11%
✓ The Coefficient of Variation (cv) for passenger height is
smaller than that for passenger mass compared to their
respective averages.
✓ There is less variation in passenger height than there is in
passenger mass.

69

3.5 Measures of Skewness (p84 – 85)

– Symmetrical Distribution

✓ The mean is equal to the

median.

– Positively Skewed Distribution

✓ The mean is
greater than the
median.

70

35
 – Negatively Skewed Distribution

✓ The mean is less than the median.

71

• Pearson’s Coefficient of Skewness (p86)

which is approximately equal to:

✓ If the mean is greater than the median the data is

positively skewed.
✓ If the mean is smaller than the median the data is
negatively skewed.

72

36
 • Bowley Coefficient of Skewness
The Bowley skewness method is used when the mean
and median are not known:

✓ Where the difference between the 3rd Quartile and

the 2nd Quartile is larger than the difference between
the 2nd Quartile and the 1st Quartile the data is
positively skewed.
✓ Where the difference between the 3rd Quartile and
the 2nd Quartile is smaller than the difference
between the 2nd Quartile and the 1st Quartile the
data is negatively skewed.
73

• Treatment of outliers (p87)

– An outlier is any data value that lies either

• Outliers must not be included in a dataset used for

inferential statistics as they will distort (bias) the
findings

74

37
 3.8 Choosing Valid Descriptive Statistics
Measures
For categorical type data:
➢ categorical frequency table;
➢ bar and pie charts;
➢ the modal category;
➢ measures of dispersion and skewness cannot
be determined.

75

For numeric type data:

➢ numeric frequency distribution and
cumulative frequency distribution;
➢ measures of central location;
➢ measures of non-central location;
➢ measures of dispersion;
➢ measures of skewness.

76

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 Chapter 4 Basic Probability Concepts

Prescribed sections 4.1 – 4.9 p 107 – 125

77

4.1 Introduction (p107)

‒ Probability is the chance of an event occurring
4.2 Types of Probability (p107)
– Deriving objective probabilities
𝑟 Where r is the number of outcomes
𝑃 𝐴 =
𝑛 and n is the number of possible outcomes

• If 355 Ford car owners were asked if the next

car they would buy will be a Ford and 76
answered YES the probability of a Ford buyer
remaining loyal is:

P ( A) =
76
= 0.214 = 21.4%
355
78

39
 • Ways to derive Objective Probabilities
— a priori – where outcomes are known in advance
— empirically – where research is conducted
— mathematically – through use of probability distributions

4.3 Properties of a Probability (p108)

— Probability has a value between 0 and 1 ( 0 and 100%) where
P(A) = 0 cannot occur and P(A) = 1 is certain to occur
— The sum of probabilities of all possible events =1 (collectively
exhaustive)
— If the probability of an event occurring is P(A) then the
probability of it not occurring is 1- P(A) (complementary
probability)

79

• Properties of a Probability (cont)

What is the probability a motorist will prefer BP?

P (BP ) =
13
= 0.26 = 26%
50
There is a 26% probability that a motorist will prefer BP

80

40
 4.4 Basic Probability Concepts (p109)
— The intersection of events

The intersection of 2 events belonging to both event

A and B simultaneously and is written as A ∩ B

81

• Basic Probability Concepts

‒ The intersection of two events
What is the probability a firm will be both small and in the
service sector?

10
P(small ∩ service) = = 0.0588 = 5.89%
170
There is a 5.89% probability that the firm will be both small and in
the service sector
82

41
 • Basic Probability Concepts
— The union of events

The union of 2 events is the set of all outcomes belonging to

event A or B or both and is written as A U B

83

• Basic Probability Concepts

‒ The union of two events (A U B)
What is the probability a firm will be either small or in the
service sector or both?

36 + 24 − 10
P(small U service) = = 0.294 = 29.4%
170
Note that the intersection is subtracted to avoid double counting
84 counting

42
 • Basic Probability Concepts
— Mutually exclusive events

Events are mutually exclusive if they cannot occur together

at the same point in time

85

• Basic Probability Concepts

‒ Collectively exhaustive events
Events are collectively exhaustive when the union of all
events is equal to the sample space.

What is the probability that a firm will

be small or medium or large?

36 + 48 + 86 170
P(small U medium U large) = = =1
170 170

86

43
 • Basic Probability Concepts
— Statistically independent events
➢ Two events, A and B, are statistically independent if the
occurrence of event A has no effect on the outcome of event B,
and vise versa.
➢ Just because two events are statistically independent does not
make them mutually exclusive.
➢ Events that are statistically independent may still occur at the
same time but the outcome of the one event does not effect
the outcome of the other event.

87

4.5 Calculating Objective Probabilities p113

– Marginal Probability P(A) is the probability of a
single event A only occurring

What is the probability of selecting a firm in the mining sector?

41
P(mining) = = 0.241 = 24.1%
170
The probability of selecting a firm in the mining sector is 24.1%

88

44
 • Calculating Objective Probabilities
– Joint Probability P(A∩B) is the probability of both
event A and event B occurring

What is the probability of selecting a medium sized firm in the

financial sector?
21
P(medium ∩ financial) = = 0.124 = 12.4%
170
The probability of selecting a medium sized firm in the financial
sector is 12.4%
89

• Calculating Objective Probabilities

– Conditional Probability P(A|B) is the probability of
event A occurring given that event B has already
P( A  B )
occurred P( A | B ) =
P( B )
What is the probability of selecting
a firm in the retail sector given that
it is already known to be medium
sized?
13
P(retail ∩ medium) = = 0.0765
170
48
P(medium) = = 0.2824
13 170
170 = 13 = 0.271 = 27.1%
P(retail | medium) = 48 48
170
90

45
 4.6 Probability Rules p116
– The addition rule for non mutually exclusive events
𝑃 𝐴∪𝐵 = 𝑃 𝐴 +𝑃 𝐵 −𝑃 𝐴∩𝐵

What is the probability of selecting a firm that is either large or in

the financial sector or both?
86 + 72 − 42 116
P(large U financial) = = = 0.682 = 68.2%
170 170
The probability of selecting a firm that is either large or in the
financial sector or both is 68.2%?
91

• Probability Rules
– The addition rule for mutually exclusive events
𝑃 𝐴∪𝐵 = 𝑃 𝐴 +𝑃 𝐵

What is the probability of selecting a firm that is either a mining

or service company?
41 24 65
P(mining U service) = + = = 0.382 = 38.2%
170 170 170
The probability of selecting a firm that is either a mining or service
company is 38.2%?
92

46
 • Probability Rules
– The multiplication rule for statistically dependent
events 𝑃 𝐴 ∩ 𝐵 = 𝑃 𝐴/𝐵 × 𝑃 𝐵

What is the probability of selecting a small retail firm?

14 33
P(small | retail) = = 0.4242 P(retail) = = 0.1942
33 170
14 33 14
P(small ∩ retail) =  = = 0.08235 = 8.2%
33 170 170

93

• Probability Rules
– To test for statistical independence: 𝑃 𝐴/𝐵 = 𝑃 𝐴
Is the size of the firm
statically independent of
the sector that the firm
operates in?

Select any one outcome from each of events A and B

86 6
P(large) = = 0.5059 P(large|retail) = = 0.0353
170 170
0.5059  0.0353
These two events are NOT statically independent

– If events are proven to be statistically independent use the

multiplication rule 𝑃 𝐴 ∩ 𝐵 = 𝑃 𝐴 × 𝑃 𝐵
94

47
 4.7 Probability Trees p120
In order for a product, consisting of 2 components, to work both
components must succeed. If the probability of component 1
failing is 5% and the probability of component 2 failing is 10%
construct a probability tree to determine the probabilities of the
product failing or succeeding?
The probability of the
product succeeding is
0.855 or 85.5%

The probability of the

product failing is
1 - 0.855 = 0.145 = 14.5%
this is also equal to
0.005 + 0.045 + 0.095 =
0.145 = 14.5%
95

4.8 Bayes’ Theorem p121

Where the outcome of event A can be influenced by information
obtained from a related event B, Bayes’ theorem revises the initial
(prior) probability of event A [P(A)] into an updated (posterior)
probability [P(AꟾB)]

𝑃(𝐴 and 𝐵)
𝑃(𝐴|𝐵) =
𝑃(𝐵)
Where: P(B) = P(A and B) + P(Ā and B)
And: P(A and B) = P(BꟾA) x P(A)

Since events A and B are sequential the problem can also be

solved using a probability tree

96

48
 Bayes’ Theorem
➢ Given the historical probability of successfully launching a new
product of 40%. Market research is known to predict a positive
test market for 80% of successful products but will predict a
positive test market for 30% of failed product launches.
➢ If the market research for the launch of a new product A comes
back positive what is the probability that the product will be
successful?
Marginal Conditional Joint

P(YꟾS) = 0.8 P(S and Y) = 0.32

➢ S = successful launch P(S) = 0.4

➢ F = failed launch P(NꟾS) = 0.2 P(S and N) = 0.08

➢ Y = research positive
P(YꟾF) = 0.3 P(F and Y) = 0.18
➢ N = research negative
P(F) = 0.6

P(F and N) = 0.42

P(NꟾF) = 0.7
1
97

Bayes’ Theorem
P(S and Y) = 0.32
P(S) = 0.4 P(NꟾS) = 0.2
P(S and N) = 0.08
P(F) = 0.6 P(YꟾF) = 0.3
P(F and Y) = 0.18
P(YꟾS) = 0.8 P(NꟾF) = 0.7
P(F and N) = 0.42

P S and Y P(S) × P(YꟾS) 0.8 × 0.4

P SY = = =
P Y P S and Y + P(F and Y) 0.32 + 0.18

0.32
= = 0.64
0.5

Given positive market research the probability of a

successful launch [P(S and F)] = 0.64 = 64%

98

49
 4.9 Counting Rules – Permutations and
Combinations p122
– The Multiplication Rule of Counting for a single
event
𝑛! = 𝑛 𝑓𝑎𝑐𝑡𝑜𝑟𝑖𝑎𝑙 = 𝑛 × 𝑛 + 1 × 𝑛 − 2 × 𝑛 − 3 × ⋯ × 3 × 2

In a six lane swimming pool how many possible permutations

(arrangements) of six swimmers can be considered?

6! = 720
There are 720 possible permutations

99

• Counting Rules – Permutations and

Combinations
– The Multiplication Rule of Counting for combined
events
𝑛1 × 𝑛2 × 𝑛3 × ⋯ 𝑛𝑗
A restaurant menu consists of 4 starters, 10 mains and 6 desserts.
How many possible permutations (arrangements) of a meal
consisting of a starter, a main and a dessert are possible?

4  10  6 = 240
There are 240 possible permutations

100

50
 • Counting Rules – Permutations and
Combinations
– The Permutations Rule
A permutation is a number of distinct ways of selecting r objects
from a larger group of n objects where the ordering IS important
𝑛!
𝑛 𝑃𝑟 = 𝑛−𝑟 ! Note that r is always smaller than n
A factory has 3 machines and 8 workers
How many possible permutations (arrangements) of workers to
machines are possible?
8!
n Pr = 8 P3 = = 336
(8 − 3)!
There are 336 possible permutations
1
The probability of any one permutation is = 0.00297 = 0.297%
336

101

• Counting Rules – Permutations and

Combinations
– The Combinations Rule
A combination is a number of distinct ways of selecting r objects from
a larger group of n objects where the ordering IS NOT important
𝑛! Note that r is always smaller than n
𝑛 𝐶𝑟 =𝑟! 𝑛−𝑟 !

A company produces 10 different flavours of fruit juice

How many possible combinations of any 3 flavours are possible?
10!
Cr =10 C3 = = 120 There are 120 possible combinations
3! (10 − 3)!
n

The probability of any 1 combination

1
being chosen is = 0.0083 = 0.83%
120
102

51
 Chapter 5 Probability Distributions

Prescribed sections 5.1 – 5.7 p 133 – 141

103

5.1 Introduction p133

— A probability distribution is a list of all possible
outcomes and their associated probabilities

5.2 Types of Probability Distribution – Discrete or

Continuous
• Continuous Probability Distributions – can take on any
value e.g. mass, distance, time
• Discrete Probability Distributions – can only take on
certain values (integer values)
e.g. number of students, number of cars

5.3 Discrete Probability Distributions can follow

either a Binomial or Poisson distribution
104

52
 5.4 Binomial Probability Distribution if:
➢ Random variable is observed n times
➢ 2 events are mutually exclusive and collectively exhaustive
➢ If the probability of success is p then the probability of failure
is (1 -p)
➢ Events are independent
𝑃 𝑥 =𝑛 𝐶𝑟 × 𝑝 𝑥 1 − 𝑝 𝑛−𝑥
for 𝑥 = 0,1,2,3 ⋯ 𝑛

Research shows 1 in 4 customers request an Opel at a car hire

company. What is the probability that 2 of the next 5 customers will
request an Opel?
P ( x = 2 )=5 C2 (0.25) 2 (1 − 0.25)
( 5− 2 )
n=5 =
x=2 10  0.0625  0.4219 =
p = ¼ =0.25 0.264 = 26.4%
105

• Binomial Probability Distribution

Research shows 20% of insurance policies are cashed in before their
maturity date. If 10 policies are randomly selected, what is the
probability that no more than 3 of these policies will be cashed in?

P ( x  3) = P ( x = 0) + P ( x = 1) + P ( x = 2) + P ( x = 3)
P ( x = 0) =10 C0 (0.2)0 (1 − 0.2 )
(10−0 )
= 0.107
P ( x = 1) =10 C1 (0.2)1 (1 − 0.2 )
(10−1)
= 0.269
P ( x = 2) =10 C2 (0.2) 2 (1 − 0.2 )
(10− 2 )
= 0.302
P ( x = 3) =10 C3 (0.2)3 (1 − 0.2 )
(10−3)
= 0.201

𝑃 𝑥 ≤ 3 = 0.107 + 0.269 + 0.302 + 0.201 = 0.879 = 87.9%

Therefore the probability that more than 3 of these policies will be

cashed in is 1 – 0.879 = 0.121 = 12.1%
106

53
 • Binomial Probability Distribution
Descriptive Statistical Measures of the Binomial Distribution
➢ The mean and standard deviation for a random variable that
follows a Binomial Distribution can be calculated using the
formulas:
𝑀𝑒𝑎𝑛: 𝜇 = 𝑛𝑝
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛: 𝜎 = 𝑛𝑝(1 − 𝑝)
➢ Research shows 20% of insurance policies are cashed in before
their maturity date. Determine the mean and standard deviation
for 10 randomly selected policies.
p = 20% = 0.2  = 10  0.2 = 2
q = 1 – 0.2 = 0.8
n = 10
 = 10  0.2  0.8 = 1.27
On average 2 policies out of 10 will be cashed in.
The standard deviation is 1.27 policies.
107

5.5 Poisson Probability Distribution (p137) if:

➢ Poisson process measures the number of occurrences of an
outcome in predetermined time, space or volume interval
where the average number of occurrences is known
➢ The Poisson question asks “What is the probability of x
occurrences of an outcome being observed in a
predetermined time, space or volume interval

𝑒 −λ λ𝑥 𝑒 −𝑎 𝑎 𝑥
𝑃 𝑥 = 𝑥!
= 𝑥!
for x = 0, 1, 2, 3 …
Where:
e = mathematical constant ≈ 2.71828
a = λ = mean
x = number of occurrences

108

54
 • Poisson Probability Distribution
A travel agency receives 5 web based queries a day on average.
What is the probability that it will receive more than 4 web
based queries on any day?
P ( x  5) = 1 − [ P ( x = 0) + P ( x = 1) + P ( x = 2) + P ( x = 3) + P ( x = 4)]
e −5 50 𝑒 −5 53
P ( x = 0) = = 0.00674 𝑃 𝑥=3 = = 0.1404
0! 3!
e −5 51
P ( x = 1) = = 0.0337
1! 𝑒 −5 54
𝑃(𝑥 = 4) = = 0.1755
e −5 52 4!
P ( x = 2) = = 0.0842
2!

P ( x  5) = 1 − [0.0067 + 0.0337 + 0.0842 + 0.1404 + 0.1755] =

1 − 0.4405 =
0.5595 = The probability of receiving more than 4
55.95% web based queries is 55.95%

109

• Poisson Probability Distribution

Descriptive Statistical Measures of the Poisson distribution
➢ Because the mean is known, the standard deviation for a
random variable that follows a Poisson Distribution can be
calculated using the formulas:

𝑀𝑒𝑎𝑛: 𝜇 = λ = a
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛: 𝜎 = λ= 𝑎

110

55
 5.6 Continuous Probability Distributions p(140)
➢ Can take on any value e.g. time, mass, distance
➢ The most widely used Continuous Probability Distribution is the
Normal Probability Distribution

5.7 Properties of Normal Probability Distribution

➢ The curve is bell curved
➢ The curve is symmetrical about the mean
➢ The tails never touch the axis
➢ The distribution is described by the mean and the standard
deviation
➢ The total area under the curve = 1, 0.5 above the mean and 0.5
below the mean
➢ The probability associated with a particular interval of x-values is
defined by the area under the curve between x1 and x2

111

112

56
 Chapter 7 Confidence Interval Estimation

Prescribed sections 7.1 – 7.9 p 179 – 190

113

7.1 Introduction (p179)

7.2 Point Estimation is made when the value of a

sample statistic is taken to be the true value of the
population parameter. This method is a unreliable
measure of a population parameter

7.3 Confidence Interval Estimation is the range of

values defined around a sample statistic in which the
population parameter is expected to lie with a certain
level of confidence

114

57
 7.4 Confidence Interval for a Single
Population Mean (μ) when the Population
Standard Deviation (σ) is known (p180)
𝑥→𝜇
• 300 shoppers sampled spend R78 on average
• Population standard deviation = R21
• Find the 95% confidence intervals for the
average spend by grocery shoppers
• z-value from t distribution tables

115

116

58
   
x−z
–   x+z or  = xz
n n n
lower limit upper limit
𝜎
x = R 78 Standard error = 𝜎𝑥 =
𝑛
𝜎 21
n = 300 𝜎𝑥 = = = 1.2124
 = 21
𝑛 300
• 95% confidence level  5% = 0.05 = 0.025 
 2 2 

therefore z-limits = ±1.96

• µ=78 ±1.96(1.2124) =
• Lower limit R75.62 to upper limit R80.38
• 95% of the time the average spend on groceries is
between R75.62 and R80.38.
117

7.5 The Precision of a Confidence Interval (p181)

– The Specified Level of Confidence specifies the
probability that the confidence interval will cover the
true population mean

118

59
 – The greater the confidence interval the wider the
range of the upper and lower limits into which the
population parameter will fall (Example 7.2 p183)
𝑥 = 35.8 𝑚𝑖𝑛 𝜎 11
𝑛 = 100 Standard error 𝜎𝑥 = = = 1.1
𝑛 100
𝜎 = 11
At 95% confidence interval
𝜎
𝜇 =𝑥±𝑧 = 35.8 ± 1.96 1.1
𝑛
Lower limit = 33.64 The population mean will fall between
Upper limit = 37.96 33.64 min and 37.96 min 95% of the time
At 90% confidence interval
𝜎
𝜇 =𝑥±𝑧 = 35.8 ± 1.645 1.1
𝑛
Lower limit = 33.99 The population mean will fall between
Upper limit = 37.61 33.99 min and 37.61 min 90% of the time
119

– As the Sample Size increases the smaller the

standard error and a more precise estimate of the
population parameter.

– As the sample size increases from 50 to 300 the

precision of the estimation of the population mean μ
improves.
120

60
 – The smaller the population Standard Deviation, in relation to
its mean, the more precise the estimate and the narrower the
confidence interval (variation of Example 7.3 p184)
At 95% confidence interval where σ = 21.5
𝑥 = 88.4 𝑚𝑜𝑛𝑡ℎ𝑠
𝑛 = 144 𝜎 21.5
Standard error 𝜎𝑥 = = = 1.792
𝜎1 = 21.5 𝑛 144
𝜎
𝜇 =𝑥±𝑧 = 88.4 ± 1.96 1.792
𝑛
Lower limit = 84.89
Upper limit = 91.91

The population mean will fall between 84.89 months and 91.91
months 95% of the time

121

– The smaller the population Standard Deviation, in relation to

its mean, the more precise the estimate and the narrower the
confidence interval (variation of Example 7.3 p184)
At 95% confidence interval where σ = 11.5
𝑥 = 88.4 𝑚𝑜𝑛𝑡ℎ𝑠
𝑛 = 144 𝜎 11.5
Standard error 𝜎𝑥 = = = 0.958
𝜎2 = 11.5 𝑛 144
𝜎
𝜇 =𝑥±𝑧 = 88.4 ± 1.96 0.958
𝑛
Lower limit = 86.52 (previously 84.89)
Upper limit = 90.28 (previously 91.91)

The population mean will fall between 86.52 months and 90.28
months 95% of the time

122

61
 7.6 The Rationale of a Confidence Interval (p185)
• If n=100 µ=32 standard error=1.1
• 95% confidence µ=32 ±1.96(1.1) =
• Lower limit R29.84 to upper limit R34.16
• At any value where the sample mean lies between
R29.84 and R34.16 the 95% confidence interval of
the sample mean will include the true mean (µ)
• Where the value where the sample mean does not
lie between R29.84 and R34.16 the 95% confidence
interval of the sample mean will not include the true
mean (µ)

123

124

62
125

7.7 The Student t-distribution (p187)

– Finding the t-limits
– From n find degrees of freedom (df = n-1)
0.05
– 95% confidence level means α = = 0.25
2
– Use t tables

126

63
127

7.8 Confidence Interval for a Single Population Mean

(μ) when the Population Standard Deviation (σ)
is unknown
𝑠 𝑠
𝑥ҧ − 𝑡 ≤ 𝜇 ≤ 𝑥ҧ + 𝑡
𝑛 𝑛
lower limit upper limit
Example 7.5 p188
𝑖𝑓 𝑥 = 170, 𝑠 = 22, 𝑛 = 25 𝑙𝑜𝑤𝑒𝑟95%
𝑠 22 = 170 − 2.064 4.4
𝜎𝑥 ≈ = = 4.4 = 160.92
𝑛 5
0.05
95% 𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝛼 = = 0.025 𝑢𝑝𝑝𝑒𝑟95%
2 = 170 + 2.064 4.4
𝑑𝑓 = 𝑛 − 1 = 24
= 179.08
𝑡 = 2.064
128

64
 7.9 Confidence Interval for the Population
Proportion (π) (p189)

𝑝 1−𝑝
𝜎𝑝 ≈
𝑛

𝑝 1−𝑝 𝑝 1−𝑝
𝑝−𝑧 ≤𝜋 ≤𝑝+𝑧
𝑛 𝑛
lower limit upper limit

129

Confidence Interval for the Population Proportion (π)

Example 7.6 p190
𝑖𝑓 𝑥 = 84, 𝑛 = 240
84
𝑝= = 0.35
240

𝑝(1 − 𝑝) 0.35(1 − 0.35)

𝜎𝑝 ≈ = = 0.0308
𝑛 240
90% 𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝛼 = 0.1 ÷ 2 = 0.05
𝑑𝑓 = 𝑛 − 1 = 239
𝑧 𝑣𝑎𝑙𝑢𝑒 = 1.645
𝑙𝑜𝑤𝑒𝑟 90% = 0.35 − 1.645(0.0308) = 0.299 = 29.9%
𝑢𝑝𝑝𝑒𝑟 90% = 0.35 + 1.645(0.0308) = 0.401 = 40.1%
There is a 90% probability the value of the population
proportion (π) lies between 29.9% and 40.1%
130

65
 ALL WORK COVERED TO
THIS POINT WILL BE
ASSESSED IN THE
SEMESTER TEST

131

Chapter 8 Hypothesis Testing: Single Population

(Means and Proportions)

Prescribed sections 8.1 – 8.5 p 198 – 218

132

66
 8.1 Introduction

8.2 The Hypothesis Testing Process

– Step 1: Define the Statistical Hypotheses (Null and
Alternative)
➢Two-sided Hypothesis Test (H0: μ = value)

➢One-sided Upper-tailed Hypothesis Test(H0: μ ≤ value)

➢One-sided Lower-tailed Hypothesis Test(H0: μ ≥ value)

133

• The Hypothesis Testing Process

– Step 2: Determine the Region of Acceptance of
the Null Hypothesis

134

67
135

• The Hypothesis Testing Process

– Step 3: Calculate the Sample Test Statistic
x−
z − stat =

n
𝜎
Where: Standard error =
𝑛

– Step 4: Compare the Sample Test Statistic to the

Area of Acceptance
– Step 5: Draw Statistical and Management
Conclusions

136

68
 Statistical and Management Conclusions

137

8.3 Hypothesis Test for a Single Population

Mean (μ) – Population Standard Deviation
(σ) is Known
• Example 8.1 page 207
• The Grocery Shoppers Association believes the
average spend by shoppers is R175.
• A survey of 360 shoppers found an average spend of
R182.40. If spending is assumed to be normally
distributed with a population standard deviation of
R67.50
• Conduct a test at the 5% level of significance to test
the claim by the Grocery Shoppers Association.

138

69
 • Hypothesis Testing
n = 360
 = 67.5
 = 0.05
z − crit = 1.96
– Step 1: Define the Statistical Hypotheses (Null and
Alternative)
➢Two-sided Hypothesis Test

H 0 :  = 175
H1 :   175
139

• Step 2: Determine the Region of Acceptance of

the Null Hypothesis
➢Accept H0 if -1.96 < z < 1.96
➢Accept H1 (reject H0) if z < -1.96 or z > 1.96

• Step 3: Calculate the Sample Test Statistic

x− 182.4 − 175 7 .4
z − stat = = = = 2.08
 67.5 3.558
n 360

140

70
 – Step 4: Compare the Sample Test Statistic to the
Area of Acceptance

141

– Step 5: Draw Statistical and Management

Conclusions
– z-stat = 2.08 > 1.96 reject H0
– It is concluded with 95% confidence that the
mean spending of grocery shoppers is not R175.
– The claim by the Grocery Shoppers Association is
therefore rejected at the 5% level of significance.

142

71
 8.4 Hypothesis Test for a Single Population
Mean (μ) – Population Standard Deviation
(σ) is Unknown
➢ Example 8.3 page 212
➢ SARS claim it takes, on average, less than 45 minutes
to complete a tax return via eFiling
Time taken to complete tax return on eFiling
42 56 29 35 47 37 39 29 45 35 51 53
𝑠
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑒𝑟𝑟𝑜𝑟 = 𝑛 = 12 (df = 11)
𝑛 𝑥 = 41.5
𝑥−𝜇 𝑠 = 9.04
𝑡 − 𝑠𝑡𝑎𝑡 = 𝑠 𝛼 = 0.05
𝑛 𝑡 − 𝑐𝑟𝑖𝑡 = ±1.796

143

• Hypothesis Testing
– Step 1: Define the Statistical Hypotheses (Null and
Alternative)
➢One-sided Lower-tailed Hypothesis Test
𝐻0 : 𝜇 ≥ 45 (It takes 45 minutes or more to
complete a tax return)

𝐻1 : 𝜇 < 45 (It takes less than 45 minutes to

complete a tax return)

144

72
 • Step 2: Determine the Region of Acceptance of
the Null Hypothesis
➢Accept H0 if t-stat ≥ -1.796
➢Accept H1 (reject H0) if t-stat < -1.796

• Step 3: Calculate the Sample Test Statistic

𝑠 9.04
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑒𝑟𝑟𝑜𝑟 = = = 2.6096
𝑛 12

x −  41.5 − 45 − 3 .5
t − stat = = = = −1.341
s 9.04 2.6096
n 12

145

– Step 4: Compare the Sample Test Statistic to

the Area of Acceptance
• Critical t = -1.796

t-crit = -1.796

146

73
 – Step 5: Draw Statistical and Management
Conclusions
➢ t-stat = -1.796 ≤ -1.341
➢ Accept H0 : µ ≥ 45
➢ It can be concluded with 95% confidence that the
mean time to complete a tax return via eFiling is
no less than 45 minutes.
➢ The claim by SARS is therefore rejected at the 5%
level of significance.

147

• When to use the Student t -statistic instead

of the z –stat (p214)
– If σ is unknown and n ≤ 40 use the t stat (with
appropriate degrees of freedom)
– If σ is unknown and n > 40 use the z stat as a
good approximation of the t stat and use s
instead of σ

148

74
 • 8.5 Hypothesis Test for a Single Population
Proportion (π) (p215)
➢ Example 8.4
➢ A Cell phone company claims it has 15% market share.
If a survey of 360 users shows 42 use the cell
company test the claim at the 1% level of significance.
n = 360
42 z − stat =
(p − )
p= = 0.1167
360  (1 −  )
 = 0.15 n
1 = 0.01
z − crit = 2.58

149

• Hypothesis Testing
– Step 1: Define the Statistical Hypotheses (Null and
Alternative)
➢Two-sided Hypothesis Test

H 0 :  = 0.15
H1 :   0.15

150

75
 • Step 2: Determine the Region of Acceptance of
the Null Hypothesis
➢α = 0.01/2 = 0.005
➢z-crit = ±2.58
➢Accept H0 if -2.58 ≤ z ≤2.58
➢Accept H1 (reject H0) if z < -2.58 or z > 2.58

• Step 3: Calculate the Sample Test Statistic

42
𝑝−𝜋 − 0.15
𝑧 − 𝑠𝑡𝑎𝑡 = = 360
𝜋 1−𝜋 0.15 1 − 0.15
𝑛 360

0.1167 − 0.15
= = −1.771
0.0188
151

– Step 4: Compare the Sample Test Statistic to

the Area of Acceptance

152

76
 – Step 5: Draw Statistical and Management
Conclusions
– z-stat = -1.771 ≥ critical z -2.58, the z-stat lies
within the area of acceptance of H0 : µ = 0.15
– We can say with 99% confidence that the claim by
the cell phone company that they have a 15%
market share is true.

153

Errors encountered in Hypothesis Testing (p203)

– Type I errors – Reject H0 when it is if fact true
– Type II errors – Accept H0 when it is if fact false

154

77
 Chapter 9 Hypothesis Testing: Comparison between
Two Populations (Means and Proportions)
Prescribed sections 9.1 – 9.3 and 9.5 p 235 – 242 and
247 - 251

155

– The z standardization formula is:

– Where: (𝑥1ҧ − 𝑥ҧ2 ) is the difference in sample means

– Where: (μ1 − μ2 ) is the difference in population means

156

78
 • Hypothesis Testing (Difference between two
means where σ is known)
– Example 9.1 (p236)
➢ Courier A used 60 times with an average delivery time
of 42 minutes and a population standard deviation of
14 minutes.
➢ Courier B used 48 times with an average delivery time
of 38 minutes and a population standard deviation of
10 minutes.
➢ Test the claim that there is no statistically significant
difference between the courier companies at a 5%
level of significance

157

• Hypothesis Testing (Difference between two

means where σ is known)
– Step 1: Define the Statistical Hypotheses (Null and
Alternative)
➢Two-sided Hypothesis Test
𝐻0 : 𝜇1 − 𝜇2 = 0 (no significant difference in
courier delivery times)

𝐻1 : 𝜇1 − 𝜇2 ≠ 0 (there is a significant
difference in courier delivery times)

158

79
 • Step 2: Determine the Region of Acceptance of
the Null Hypothesis
➢α = 0.05/2 = 0.025
➢z-crit = ±1.96
➢Accept H0 if -1.96 ≤ z ≤ 1.96
➢Accept H1 (reject H0) if z < -1.96 or z > 1.96

• Step 3: Calculate the Sample Test Statistic

𝑥ҧ1 − 𝑥ҧ2 − 0 42 − 38 − 0
𝑧 − 𝑠𝑡𝑎𝑡 = = = 1.73
𝜎12 𝜎22 142 102
+ 60 + 48
𝑛1 𝑛2

159

• Step 4: Compare sample statistic to critical value

➢Sample test z stat is within the critical z value limits
➢z-stat = 1.73

• Step 5: Statistical and management conclusion

➢At a 5% level of significance we accept H0
➢There is no statistically significant difference
between the courier companies 95% of the time.
160

80
161

• Hypothesis Testing (Difference between two

means where σ is unknown)
– Example 9.2 (p241)
➢ A financial analyst proposes the % return on
investment (ROI%) for financial companies is greater
than the ROI% for manufacturing firms.
➢ A sample of 28 financial firms provides a mean ROI%
of 18.714% with a sample standard deviation of
9.645% and a sample of 24 manufacturing firms
provides a mean ROI% of 15.125% with a sample
standard deviation of 8.823%.
➢ Conduct a hypothesis test at a 5% level of significance.

162

81
 • Hypothesis Testing (Difference between two
means where σ is unknown)
– Step 1: Define the Statistical Hypotheses (Null and
Alternative)
➢One-sided upper tailed Hypothesis Test
𝐻0 : 𝜇1 − 𝜇2 ≤ 0 (ROI% of financial firms is
not significantly greater than ROI% of manufacturing
firms)

𝐻1 : 𝜇1 − 𝜇2 > 0 (ROI% of financial firms is

greater than ROI% of manufacturing firms as per the
analysts claim)

163

• Step 2: Determine the Region of Acceptance of the

Null Hypothesis
➢α = 0.05
➢where degrees of freedom (df) = 𝑛1 + 𝑛2 − 2 =
28 + 24 – 2 = 50
➢t-crit = +1.676
➢Accept H0 if t ≤ 1.676
➢Accept H1 (reject H0) if t > 1.676

164

82
 • Step 3: Calculate the Sample Test Statistic

𝑛1 − 1 𝑠12 + 𝑛2 − 1 𝑠22
𝑠𝑝2 =
𝑛1 + 𝑛2 − 2

28 − 1 × 9.6452 + 24 − 1 × 8.8232
= = 86.0468
28 + 24 − 2

𝑥ҧ1 − 𝑥ҧ2 − 𝜇1 − 𝜇2 18.714 − 15.125 − 0

𝑡 − 𝑠𝑡𝑎𝑡 = =
1 1 1 1
𝑠𝑝2 𝑛 + 𝑛 86.0468 × 28 + 24
1 2

= 1.391

165

• Step 4: Compare sample statistic to critical value

➢Sample test t stat is within the critical t value limits
➢t-stat = 1.391 < t-crit = 1.676

166

83
 • Step 5: Statistical and management conclusion
➢At a 5% level of significance we accept H0
➢There is no statistically significant difference
between the ROI% of financial and manufacturing
firms at the 5% level of significance.
➢The claim by the financial analyst that the ROI% of
financial firms is greater than the ROI% of
manufacturing firms is rejected at the 5% level of
significance

167

( p1 − p2 ) → ( 1 −  2 )

168

84
 • Hypothesis Testing (Difference between two
proportions)
– Example 9.4 (p248)
➢ A research company is required to establish if the
recall rate of teenagers is different from the recall rate
for young adults of a recent AIDS awareness campaign.
➢ A sample of 640 teenagers and 420 young adults were
interviewed. 362 teenagers and 260 young adults were
able to recall the AIDS awareness campaign.
➢ Conduct a hypothesis test at a 5% level of significance
to test the claim that there is an equal recall rate for
both groups.

169

• Hypothesis Testing (Difference between two

proportions)
– Step 1: Define the Statistical Hypotheses (Null and
Alternative)
➢Two tailed Hypothesis Test
𝐻0 : 𝜋1 − 𝜋2 = 0 (as per the claim of equal
recall rates)

𝐻1 : 𝜋1 − 𝜋2 ≠ 0

170

85
 • Step 2: Determine the Region of Acceptance of the
Null Hypothesis
➢α = 0.05/2 = 0.025
➢where degrees of freedom (df) = 𝑛1 + 𝑛2
= 640 + 420 = 1060
➢z-crit = ±1.96
➢Accept H0 if -1.96 ≤ z ≤ 1.96
➢Accept H1 (reject H0) if z < -1.96 or z > 1.96

171

• Step 3: Calculate the Sample Test Statistic

362
𝑝1 = 640 = 0.5656 where 𝑛1 = 640

260
𝑝2 = 420 = 0.619 where 𝑛2 = 420

362 + 260
𝜋ො = = 0.5868
640 + 420

1 1
Standard error = 𝜋ො × 1 − 𝜋ො × 𝑛1
+𝑛 =
2

1 1
0.5868 × 1 − 0.5868 × + = 0.0309
640 420

172

86
 Standard error = 0.0309

𝑝1 − 𝑝2 − 𝜋1 − 𝜋2
𝑧 − 𝑠𝑡𝑎𝑡 =
𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑒𝑟𝑟𝑜𝑟

0.5656 − 0.619 − 0
=
0.0309

= −1.728

173

• Step 4: Compare sample statistic to critical value

➢Sample test t stat is within the critical t value limits
➢z-crit = − 1.96 < z-stat = −1.728 < z-crit = + 1.96

174

87
 • Step 5: Statistical and management conclusion
➢At a 5% level of significance we accept H0
➢We can say with 95% confidence that there is no
statistically significant difference in the recall rate
of the AIDS awareness campaign between
teenagers and young adults.

175

Chapter 10 Chi-Square Hypothesis Tests

Prescribed sections 10.1 – 10.3 p 271 – 281

176

88
 10.1 Introduction and Rationale

• The chi-squared statistic, written as χ2, is used

to test hypothesis on patterns of outcomes for
categorical random variables.
• The chi-squared test can be used in three
different contexts, of which we study two:
➢ to test for independence of association
between two categorical variables, e.g. ‘Is
the choice of magazine read associated with
the reader’s gender?

177

➢to test for equality of proportions across two

or more populations, e.g. ‘Is the percentage of
unionised workers per firm the same across
four construction firms?
➢as a goodness-of-fit test, (is not within the
scope of this course) e.g. ‘Is the completion
time (in minutes) for a task normally
distributed?

178

89
 The Chi-Squared Statistic
• The chi-squared test is based on frequency
count data. It always compares a set of
observed frequencies obtained from a random
sample to a set of expected frequencies that
describes the null hypothesis.

179

10.2 The Chi-Square test for

Independence of Association
– Example 10.1 (p273)
➢ A company publishes 3 magazines, Beat, Youth and
Grow. Management would like to know if teenage
readership preference is independent of gender.
➢ A survey of 200 randomly selected teenagers (80 girls
and 120 boys) was conducted and their magazine
preference and gender recorded.

180

90
 Table of gender by magazine preference

➢ Conduct a chi-squared hypothesis test, at a 5% level of

significance, to determine if there is a statistical
association between gender and magazine preference.

181

Exploratory Data Analysis

➢ By converting the frequency counts to percentages
any likely association between gender and magazine
preference may be identifiable.

➢ Females seem to prefer Grow magazine, males seem

to prefer Beat magazine and the preference for Youth
magazine seems evenly spread between genders.
182

91
 Hypothesis test for independence
of association
• Step 1: Define the null and alternative
hypotheses
➢ 𝐻0: There is no association between
gender and magazine preference.
➢ 𝐻1: There is an association between
gender and magazine preference.

183

184

92
 • Step 2: Determine the region of acceptance of the
null hypothesis
➢ α = 0.05
➢ 𝑑𝑓 = (𝑟 − 1)(𝑐 − 1)
➢ df = (2-1)x(3-1) = 2
➢ Critical χ2 = 5.991. Accept H0 if χ2 ≤ 5.991

185

• Step 3: Calculate the sample test statistic (χ2 -stat)

To calculate the expected frequencies:
𝑟𝑜𝑤 𝑡𝑜𝑡𝑎𝑙 × 𝑐𝑜𝑙𝑢𝑚𝑛 𝑡𝑜𝑡𝑎𝑙
𝑓𝑒 =
𝑛

186

93
 • Construct the χ2 table for observed (fo) and
expected (fe) frequencies

187

• Step 4: Compare the sample statistic to the region

of acceptance
➢Sample χ2 = 4.964 < Critical χ2 = 5.991
➢ Sample χ2 is within the critical χ2 limits

188

94
 • Step 5: Statistical and management conclusion
➢At a 5% level of significance we accept H0
➢There is no statistically significant difference
in the preference for magazines based on
the readers gender.

189

10.3 Hypothesis test for equality of multiple

proportions
– Example 10.2 (p278)
➢ A retail company would like to know if the proportion of
customers with loyalty cards is the same in three different
stores at the 10% significance level.
➢ A random sample of 180 customers across the three
different stores was selected and the number of loyalty
card holders recorded.

190

95
 Hypothesis test for equality of multiple
proportions

• Step 1: Define the null and alternative

hypotheses
➢ 𝐻0: π1 = π2 = π3 (Proportions are equal
across all stores).
➢ 𝐻1: Proportions are not equal in at least
one store.

191

• Step 2: Determine the region of acceptance of the

null hypothesis
➢ α = 0.1
➢ 𝑑𝑓 = (𝑟 − 1)(𝑐 − 1)
➢ df = (2-1)x(3-1) = 2
➢ Critical χ2 = 4.605 Accept H0 if χ2 ≤ 4.605

192

96
 • Step 3: Calculate the sample test statistic (χ2 -stat)
To calculate the expected frequencies:
𝑟𝑜𝑤 𝑡𝑜𝑡𝑎𝑙 × 𝑐𝑜𝑙𝑢𝑚𝑛 𝑡𝑜𝑡𝑎𝑙
𝑓𝑒 =
𝑛

193

• Construct the χ2 table for observed (fo) and

expected (fe) frequencies

194

97
 • Step 4: Compare the sample statistic to the region
of acceptance
➢Sample χ2 = 3.805 < Critical χ2 = 4.605
➢ Sample χ2 is within the critical χ2 limits

195

• Step 5: Statistical and management conclusion

➢At a 10% level of significance we accept H0
➢There is no statistically significant difference
in the proportion of loyalty card holders in
the three different stores.

196

98
 Chapter 12 Linear Regression and Correlation Analysis

Prescribed sections 12.1 – 12.5 p 328 – 342

197

12.1 Introduction
In management, many numeric measures are
related (either strongly or loosely) to one
another. For example:
➢ advertising expenditure is assumed to
influence sales volumes;
➢ a company’s share price is likely to be
influenced by its return on investment;
➢ the number of hours of operator training is
believed to impact positively on productivity.

198

99
 • Scatter plot between pairs of x and y

199

12.2 Simple Linear Regression Analysis

Simple linear regression analysis finds a straight-
line equation that represents the relationship
between the values of two numeric variables.

Where:
y = a + bx
y = dependent variable
a = intercept on the vertical axis (value of y
when x = 0)
y
b = gradient (b = x )
x = independent variable
200

100
 • Example 12.1 Flat screen TV Sales p330

Step1: Identify the dependent and independent variables

Step 2: Construct a scatter plot

201

Step3: Calculate the linear regression equation using the

STAT mode in your calculator
➢ Press MODE choose STAT
➢ Select 2:A+BX
➢ enter the x and y variables
➢ Press AC
𝑛 σ 𝑥𝑦 − σ 𝑥 σ 𝑦
➢ To determine b use the formula 𝑏 = 𝑛 σ 𝑥2 − σ 𝑥 2

σ 𝑦 −𝑏 σ 𝑥
➢ To determine a use the formula 𝑎 = 𝑛

➢ From the 5:Reg option retrieve the values for 1:A and
2:B to confirm your answers
➢ Plot the regression line

Note: In formula 12.1 on page 333 the text book refers

to b0 instead of a and b1 instead of b

202

101
 𝑦 = 12.817 + 4.368𝑥
203

12.3 Correlation Analysis

➢ The reliability of the estimate of y depends on
the strength of the relationship between the x
and y variables. A strong relationship implies a
more accurate and reliable estimate of y.
➢ Correlation analysis measures the strength of
the linear association between two numeric
(ratio-scaled) variables, x and y.

204

102
 • Correlation Analysis (cont)
➢This measure is called Pearson’s correlation
coefficient. It is represented by the symbol r
➢When r is calculated from sample data the
following formula is used :

➢The value or r can be confirmed by retrieving the

r value with your calculator
➢ Press Shift 1
➢ Press 5:Reg
➢ Retrieve the value for 5:r
➢ r2 can be calculated by pressing the x2 button

205

• Correlation Analysis (cont)

Pearson’s correlation coefficient can be calculated using the
formula’s provided in the formula sheet

➢ Press Shift 1
➢ Press 3:Sum
➢ Retrieve the values for 1:∑x2; 2:∑x ; 3:∑y2; 4:∑y; 5:∑xy
➢ Press Shift 1
➢ Press 4:Var
➢ Retrieve the values for 1:n

206

103
 • Predicting the value of the dependent
variable for a given independent variable
➢ Once the regression equation has been estimated it is
possible to predict the value of the dependent variable (y)
for any given dependent variable (x) by substitution.
Flat-screen TV sales and adverts placed
Adverts 4 4 3 2 5 2 4 3 5 5 3 4
Sales 26 28 24 18 35 24 36 25 31 37 30 32
➢ a = 12.816; b = 4.368
➢ y = 12.816 + 4.368x
➢ Estimate the sales level if the firm places 6 advertisements
➢ y = 12.816 + 4.368(6) = 39
➢ Thus if 6 adverts are placed we predict the firm will sell 39
TV’s

207

• How to interpret a Correlation

Coefficient

208

104
 • Perfect associations

209

• Strong associations

210

105
 • Moderate to weak associations

211

• No association

212

106
 12.4 The Coefficient of Determination (r2)
The coefficient of determination can be calculated by squaring
the correlation coefficient (r)

➢ 0 ≤ r2 ≤ 1 which can be interpreted as 0% ≤ r2 ≤ 100%

213

12.5 Testing the Regression Model for

Significance
➢ Example 12.4 page 341
Flat-screen TV sales and adverts placed
Adverts 4 4 3 2 5 2 4 3 5 5 3 4
Sales 26 28 24 18 35 24 36 25 31 37 30 32

• Use the same 5 steps as Hypothesis Testing

– Step 1: Define the Statistical Hypotheses (Null and
Alternative)
➢Two tailed Hypothesis Test
𝐻0 : 𝜌 = 0 (No relationship between adverts and sales)
𝐻1 : 𝜌 ≠ 0 (Adverts and sales are related)

214

107
 Step 2: Determine the Region of Acceptance of the Null
Hypothesis
➢At a 5% level of significance α = 0.025
➢Degrees of freedom (df) = n – 2 = 12 – 2 = 10
➢ Accept H0 if -2.228 ≤ t-stat ≤ 2.228
➢Accept H1 (reject H0) if t-stat < -2.228 or > 2.228

• Step 3: Calculate the Sample Test Statistic

𝑛−2 12 − 2 10
𝑡 − 𝑠𝑡𝑎𝑡 = 𝑟 = 0.8198 = 0.8198 × = 4.527
1 − 𝑟2 1 − 0.81982 0.3279

215

– Step 4: Compare the Sample Test Statistic to

the Area of Acceptance
• t stat = 4.527 > critical t = 2.228
• Reject H0

216

108
 – Step 5: Draw Statistical and Management
Conclusions
➢ t-stat = 4.527 > critical t = 2.228
➢ Reject H0 : 𝜌 = 0
➢ Accept 𝐻1 : 𝜌 ≠ 0
➢ It can be concluded with 95% confidence that
there is a strong positive correlation between the
number of advertisements placed and the sales
of flat-screen TV’s.

217

Chapter 14 Index Numbers

Prescribed sections 14.1 – 14.3 p 375 – 390

218

109
 14.1 Introduction

• Classification of Index Numbers

There are two major categories of index numbers. Within each
category, an index can be calculated for either a single item
or a basket of related items. These categories are:
➢ price indexes
– single price index
– composite price index
➢ quantity indexes
– single quantity index
– composite quantity index

219

14.2 Price Indexes

• Simple Price Index (Price Relative)
➢ The simple price index is the change in price from
a base period to another time period for a single
item. It is also called a price relative.

Example 14.1 p377

➢ In January 2008 petrol cost R6.87 per litre, in January 2009
the price was R7.18 per litre, in January 2010 the price was
R7.58 per litre and in January 2011 the price was R8.44 per
litre.
➢ Using 2008 as the base year calculate the price relatives for
2009, 2010 and 2011
220

110
 Example 14.1 p377
6.87
➢ 𝑃𝑟𝑖𝑐𝑒 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒(2008) = 6.87 × 100 = 100 (Base year)

7.18
➢ 𝑃𝑟𝑖𝑐𝑒 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒(2009) = 6.87 × 100 = 104.5 (4.5% increase
since 2008)

7.58
➢ 𝑃𝑟𝑖𝑐𝑒 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒(2010) = 6.87 × 100 = 110.3 (10.3% increase
since 2008)

8.44
➢ 𝑃𝑟𝑖𝑐𝑒 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒(2011) = 6.87 × 100 = 122.9 (22.9% increase
since 2008)

221

• Composite Price Index for a Basket

of Items
➢ The composite price index measures the average
price change for a basket of related items from one
time period (the base period) to another time
period (the current period)
✓ To calculate the composite price index each item is
weighted according to it’s importance
✓ Importance is determined by the value of each item
(price x quantity)
✓ To determine weighting quantities consumed must
be held constant

222

111
 • Laspeyres vs Paasche weighting
methods
➢ The Laspeyres approach holds quantities constant
at base period values
➢ The Paasche approach holds quantities constant
at current period values

223

Example 14.2 p379

➢ Using 2010 as the base year calculate the Laspeyres
weighted aggregate composite price index for 2011.
Base Year (2010) Current Year (2011)
Unit Price Quantity Unit Price Quantity
Toiletry Items
p0 q0 p1 q1
Soap R1.95 37 R2.10 40
Deodorant R14.65 24 R15.95 18
Toothpaste R6.29 14 R6.74 16
➢ Step 1: Find the base year σ 𝑝0 × 𝑞0 .
Base Year Value
Toiletry Items p0 q0 p0 x q0
Soap R1.95 37 72.15
Deodorant R14.65 24 351.60
Toothpaste R6.29 14 88.06
∑(p0 x q0) 511.80
224

112
 ➢ Step 2: Find the current year σ 𝑝1 × 𝑞0 .

Current Year Value

Toiletry Items p1 q0 p1 x q0
Soap R2.10 37 77.70
Deodorant R15.95 24 382.80
Toothpaste R6.74 14 94.36
∑(p1 x q0) 554.86

σ 𝑝1 ×𝑞0
➢ Step 3: Calculate the composite price index σ × 100
𝑝0 ×𝑞0
554.86
➢ . 511.81 × 100 = 108.84

➢ Step 4: Management interpretation

➢ Between 2010 and 2011 the prices of the basket of toiletry
items increased by 8.84% using the Laspeyres weighted
aggregates method.
225

Example 14.2 p379

➢ Using 2010 as the base year calculate the Paasche
weighted aggregate composite price index for 2011.
Base Year (2010) Current Year (2011)
Unit Price Quantity Unit Price Quantity
Toiletry Items
p0 q0 p1 q1
Soap R1.95 37 R2.10 40
Deodorant R14.65 24 R15.95 18
Toothpaste R6.29 14 R6.74 16
➢ Step 1: Find the base year σ 𝑝0 × 𝑞1 .
Base Year Value
Toiletry Items p0 q1 p0 x q1
Soap R1.95 40 78.00
Deodorant R14.65 18 263.70
Toothpaste R6.29 16 100.64
∑(p0 x q1) 442.34
226

113
 ➢ Step 2: Find the current year σ 𝑝1 × 𝑞1 .

Current Year Value

Toiletry Items p1 q1 p1 x q1
Soap R2.10 40 84.00
Deodorant R15.95 18 287.10
Toothpaste R6.74 16 107.84
∑(p1 x q1) 478.94

σ 𝑝1 ×𝑞1
➢ Step 3: Calculate the composite price index σ × 100
𝑝0 ×𝑞1
478.94
➢ . 442.34 × 100 = 108.3

➢ Step 4: Management interpretation

➢ Between 2010 and 2011 the prices of the basket of toiletry
items increased by 8.3% using the Paasche weighted
aggregates method.

227

14.3 Quantity Indexes

➢ A quantity index measures the percentage change
in consumption level, either for a single item (e.g.
milk) or a basket of items (e.g. hardware tools),
from one time period to another.

• Simple Quantity Index (Quantity Relative)

➢ The simple quantity index is the change in quantity
from a base period to another time period for a
single item. It is also called a quantity relative.
𝑞1
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑟𝑒𝑙𝑎𝑡𝑖𝑣𝑒 = × 100%
𝑞0

228

114
 Example 14.5 p385
➢ In 2009 a hardware store sold 143 doors. In 2010 they sold
122 doors and in 2011 they sold 174 doors.
➢ Using 2009 as the base year calculate the quantity relatives
for 2010 and 2011

143
➢ 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒(2009) = 143 × 100 = 100 (Base year)

122
➢ 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒(2010) = 143 × 100 = 85.3 (14.7%
decrease since 2009)

174
➢ 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒(2011) = 143 × 100 = 121.7 (21.7%
increase since 2009)

229

• Composite Quantity Index for a basket

of items
➢ The composite quantity index measures the
average quantity change for a basket of related
items from one time period (the base period) to
another time period (the current period)
✓ To calculate the composite quantity index each
item is weighted according to it’s importance
✓ Importance is determined by the value of each item
(price x quantity)
✓ To determine weighting prices must be held
constant

230

115
 • Laspeyres vs Paasche weighting
methods
➢ The Laspeyres approach holds prices constant at
base period values
➢ The Paasche approach holds prices constant at
current period values
Σ 𝑝0 𝑞1
𝐿𝑎𝑠𝑝𝑒𝑦𝑟𝑒𝑠 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑖𝑛𝑑𝑒𝑥 =
Σ(𝑝0 𝑞0 )

Σ 𝑝1 𝑞1
𝑃𝑎𝑎𝑠𝑐ℎ𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑖𝑛𝑑𝑒𝑥 =
Σ(𝑝1 𝑞0 )

231

Example 14.6 p386

➢ Using 2010 as the base year calculate the Laspeyres
weighted aggregate composite quantity index for 2011.
Base Year (2010) Current Year (2011)
Unit Price Quantity Unit Price Quantity
Carpentry Items
p0 q0 p1 q1
Cold glue R13.00 45 R15.00 52
Boards R63.00 122 R77.00 110
Paint R122.00 16 R125.00 20
➢ Step 1: Find the base year σ 𝑝0 × 𝑞0 .
Base Year Value
Carpentry Items p0 q0 p0 x q0
Cold glue R13.00 45 585.00
Boards R63.00 122 7686.00
Paint R122.00 16 1952.00
∑(p0 x q0) 10223.00
232

116
 ➢ Step 2: Find the current year σ 𝑝0 × 𝑞1 .

Current Year Value

Carpentry
p0 q1 p0 x q1
Items
Cold glue R13.00 52 676.00
Boards R63.00 110 6930.00
Paint R122.00 20 2440.00
∑(p0 x q1) 10046.00
σ 𝑝0 ×𝑞1
➢ Step 3: Calculate the composite quantity index σ × 100
𝑝0 ×𝑞0
10046
➢ × 100 = 98.27
10223

➢ Step 4: Management interpretation

➢ Between 2010 and 2011 the quantities of the basket of
carpentry items decreased by 1.73% using the Laspeyres
weighted aggregates method.
233

Example 14.6 p386

Using 2010 as the base year calculate the Paasche weighted
aggregate composite quantity index for 2011.
Base Year (2010) Current Year (2011)
Unit Price Quantity Unit Price Quantity
Carpentry Items
p0 q0 p1 q1
Cold glue R13.00 45 R15.00 52
Boards R63.00 122 R77.00 110
Paint R122.00 16 R125.00 20
➢ Step 1: Find the base year σ 𝑝1 × 𝑞0 .
Base Year Value
Carpentry Items p1 q0 p1 x q0
Cold glue R15.00 45 675.00
Boards R77.00 122 9394.00
Paint R125.00 16 2000.00
∑(p0 x q1) 12069.00
234

117
 ➢ Step 2: Find the current year σ 𝑝1 × 𝑞1 .

Current Year Value

Carpentry Items p1 q1 p1 x q1
Cold glue R15.00 52 780.00
Boards R77.00 110 8470.00
Paint R125.00 20 2500.00
∑(p1 x q1) 11750.00

σ 𝑝1 ×𝑞1
➢ Step 3: Calculate the composite quantity index σ × 100
𝑝0 ×𝑞1
11750
➢ × 100 = 97.36
12069

➢ Step 4: Management interpretation

➢ Between 2010 and 2011 the quantities of the basket of
carpentry items decreased by 2.64% using the Paasche
weighted aggregates method.

235

THE END

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