INSTRUCTOR INTRODUCTIOON

• DR. MUHAMMAD IFTIKHAR UL HUSNAIN

• ASSISTANT PROFESOR ,DEPARTMENT OF MANAGEMENT
SCIENCES COMSATS, ISLAMABAD SINCE 2012
• LECTURER IN ECONOMICS PUNJAB HIGHER EDUCATION
DEPARTMENT
• AREAS OF INTERST
• MICRO ECONOMICS
• MACRO ECONOMICS
• MATHEMATICAL ECONOMICS
• STATISTICS
• PUBLIC FINANCE
 Course: MGT 605 Quantitative Techniques
Instructor: Dr. Muhammad Iftikhar ul Husnain
Course overview
 Definition of Quantitative Techniques
 Nature and Scope of Quantitative Techniques
 Data
 Sampling
 Simple regression
 Multiple regression
 Multicollinearity

 Auto correlation

 Hetrosekasdicity

 Dummy variables.
 Logit model
 Probit model
 Panel data
 Course Overview ….
Books
• Quantitative Methods for Business by Anderson Sweeny and Williams
• Quantitative analysis for management by Render, Stair, Hanna

• Johnston, J. and J. DiNardo (n.d). Econometric Methods (4th Eds.) The

McGraw Hill Companies.

• Maddala, G. S. (1992). Introduction to Econometrics, (2nd Edition),

Macmillan Publishing Company, New York.

• J. Wooldridge, Introductory Econometrics, 4th Edition, South Western

College Press
 Introduction
Back Ground
• Quantitative tools have been used for thousands of years (Taylor and Frederick)

• Quantitative analysis can be applied to a wide variety of problems acrossdescipline

• It’s not enough to just know the mathematics of a technique

• One must understand the specific applicability of the technique, its limitations, and
its assumptions
Definition
• Quantitative Technique: Any procedure, formulae, instrument, model that helps in
analyzing any hypothesis, theory, statement is called quantitative techniques.
• In Quantitative analysis, we may be interested in predicting Y with X, or with the
casual effect of X on Y.
• Quantitative analysis is a scientific approach to decision making whereby raw data
are processed and manipulated resulting in meaningful information.
• Raw data--application of QT----Meaningful information
 Qualitative versus quantitative analysis

Qualitative Quantitative

 It gives a general and It gives clear, specific and numerical prediction of

unspecified view the problem
 Focus on words Focus on number

 Subjective Objective

 Case studies Statistical Analysis

 fewer respondents higher number of respondents

 No standardized data Standardized data analysis

analysis
 Explores impact (why) Suggests/quantify the impact
 Quantitative vs. Qualitative factors

Quantitative factors
Might be different investment levels, interest rates, inventory levels, demand, or labor cost
Qualitative factors
such as the weather, state and federal legislation, and technology breakthroughs should also be
considered. Political instability

Information may be difficult to quantify but can affect the decision-making process
Why Study Quantitative Techniques

 In your everyday life, it will help you make sense of what to heed and what to ignore in statistical

information provided in news reports, surveys, political campaigns, advertisements

 From house to stock market

 Advantages of Quantitative Analysis

1- It can accurately represent reality

2- It can help a decision maker formulate problems

3- It can give us insight and information

4- It can save time and money in decision making and problem solving

5- It may be the only way to solve large or complex problems in a timely fashion

6- It can be used to communicate problems and solutions to others

7- it can help in forecasting the future on the basis of available information

 How the Quantitative Approach Works

It is a systematic process
1- Define the problem
 It is a starting point

 Develop a clear and concise statement.

 Most important and difficult step

 selecting the right problems is very important

 Specific and measurable objectives may have to be developed

 In the real world, quantitative analysis models can be complex, expensive and time

consuming.
 2- Developing a Mathematical Model
What a Model is?
A model is simply a set of mathematical equations.

A model is a mathematical representation of a theory/reality.

Single equation model

If a model has only one equation it is called a single-equation model.

Multiple-equation model

If it has more than one equation

 Models generally contain variables, and parameters

 Parameters are unknown quantities but there value is fixed.

 How to Develop a Quantitative Model….
 An important part of the quantitative analysis approach

 Mathematical Models have two major types.

 Mathematical models that do not involve risk are called deterministic models.

 We know all the values used in the model with complete certainty.

 Mathematical models that involve risk, chance, or uncertainty are called

probabilistic models

 In this course our concern is with the probabilistic model.

 Example: Demand function

 Profit function
 3- Specification of the probabilistic/econometric Model

 Mathematical model assumes that there is an exact relationship between the

variables.

 However it is not of much interest in social sciences

 But relationships between variables are generally inexact in social sciences.

 The introduction of error term

 It captures the effect of unquantifiable forces.

 4- Significance of the stochastic term Ui

 Error term is proxy for all the omitted variables but collectively affect Y.

- Why not introduce all the variable explicitly?

 Unavailability of data

 Core versus peripheral variables- joint effect of many variable is so small that

for practical consideration and cost effectiveness it does not pay to introduce

them explicitly in the model.

 Randomness in Human Behavior

 Poor Proxy Variable

 Principle of parsimony

 Wrong functional form

 4- Acquiring data

 To estimate the Statistical model given/ obtain the numerical values of β1 and β2 ,

we need data.

 Data may come from a variety of sources such as company reports, company

documents, interviews.

 The quality data is extremely important.

 The reliability of results is directly proportional to quality of data.

 Data collecting is an art.

 Data is collected only on the required variables.

 5. Estimation of the Statistical Model

• To estimate the values of the parameters we need some techniques.

• Common techniques are

– Solving equations

– Trial and error – trying various approaches and picking the best result
 6- Hypothesis Testing/testing the solution

Model should be tested for accuracy before analysis and implementation.

• Whether the results are according to the theory .

• Results should be logical, consistent, and represent the real situation.

• We use statistical inference (hypothesis testing) to know the significance of the

parameter.
 7- Forecasting or Prediction

• If the chosen model does not refute the hypothesis or theory under consideration,

• we may use it to predict the future value(s) of the dependent variable Y on the basis

of known variables.

8- implementing the results/ policy

• Implementation can be very difficult

• People can resist changes

• Many quantitative analysis efforts have failed because a good, workable solution was

not properly implemented

 Possible Problems in the Quantitative Analysis
Approach

 Problems are not easily identified

 Conflicting viewpoints-linear or non linear relationship

 Beginning assumptions

 Fitting the textbook models

 Understanding the model

 Validity of data

 Hard-to-understand mathematics and statistics

 Variables and their Types

Ratio scale

Two values of a variable say X1 and X2,

(i)X1/X2 (ii)(X1-X2) (iii) X1≤ X2 and vice versa are meaningful quantities. Most economic

variable are ratio scale.

Interval Scale
Satisfies last two properties. Distance b/w two time periods (2012-1990) is meaningful. But
1990/2012 is senseless.
Ordinal Scale
Only it satisfies the third property of ratio scale. Grades, A,B,C,D. Upper, Middle, Lower.
Example: Indifference curve in Economics
Nominal Scale:
None of the feature of ratio scale. Gender, male, female, marital status, single, married,
divorced, unmarried simply denote categories
 Probability
• A probability is a numerical statement about the chance that an event will occur.
• Two basic rules regarding the probability
• 1- The probability, p, of any event is greater than or equal to 0 and less than or
equal to 1. 0≤p≤1

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

b- 1 means that an event is always to occur.

2- The sum of the simple probabilities for all possible outcomes of an activity must be
equal to 1.

Examples:
Quantity Demanded Number of days
0 40 p=40/200 (.20)
1 80 p=80/200 (.40)
2 50 p=(50/200) (.25)
3 20
4 10
 Types of probability

Two different ways to determine the probability

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

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

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

Examples

• what is the probability that floods will come?

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

• For this opinion polls are conducted and then probabilities are found.
Mutually exclusive and collectively exhaustive events
Mutually exclusive events : If only one of the event can occur on any one trial.

Collectively exhaustive events: They are said to be mutually exhaustive if the list
include all the possible outcomes i.e. A U B= S.

Not mutually exclusive

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

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

5 and diamond
 Adding mutually exclusive events
• We are interested in whether one event or second event will occur.
• When events are mutually exclusive the law of addition is simply as follows.
• P(event A or event B)= p(event A)+ p(event B)
• Drawing spade or drawing a club out of a deck card are mutually exclusive. 13/52+13/52=1/2
• Venn diagram

• Addition of not mutually exclusive events.

• P(A or B)= P(A)+P(B)-P(A and B)

• Venn diagram

• Examples:

• In a math class of 30 students, 17 are boys and 13 are girls. On a unit test, 4 boys and 5 girls

made an A grade. If a student is chosen at random from the class, what is the probability of

choosing a girl or an A student?

• P(girl or A)= P(girl)+ P(A)- P(girl and A)= 13/30+9/30-5/30=17/30

 Some Basic Concepts in Mathematics
Derivatives
• Definition
• Maxima
• Minima
Rules of Derivatives
1- Constant function rule
2- Power function rule

3- Sum difference rule

4- Product rule

5- Quotient rule

6- Chain rule

7- Inverse function rule

 Notation
Dependent variable Independent variable
Explained variable Explanatory variable

Predictand Predictor

Regressand Regressor

Response Stimulus

Endogenous Exogenous

Outcome Covariate

Controlled variable Control variable

LHS RHS