TOOLS FOR ECONOMIC ANALYSIS.docx

[TOOLS FOR ECONOMIC ANALYSIS] Basic tools for economic analysis are tools required to reduce the wordiness of economic theories and principles and helps to present them in clearer concise forms. Some of these tools are: a. Simple linear equation b. Simultaneous equation c. Measure of dispersi...

[TOOLS FOR ECONOMIC ANALYSIS] Basic tools for economic analysis are tools required to reduce the wordiness of economic theories and principles and helps to present them in clearer concise forms. Some of these tools are: a. Simple linear equation b. Simultaneous equation c. Measure of dispersion 1. Simple Linear equation In this, frictional relationship between two variables can be illustrated symbolically. For example, lets say the demand for more plate of rice depend on the availability of meat. This can be illustrated symbolically as: Qr= F(m) Where Qr is equal to the demand of rice. Then "m" is equal to the demand of meat. Also if the demand for indomie noodles depend on its price this can also be illustrated as thus: Qr= P(Pi) Also, it is generally known in economic parlance that the consumption of an individual depends on his level of income; that is, consumption is a function of income. This is illustrated as: C= F(x) Where C= Consumption and x= income If consumption (c) increases as income (x) increases, then C and x varies directly. E.g C= 12 + 2y On the other hand, if C decreases as Y increases, then they vary inversly. E.g C= 12 - 2y Example 1 If a household consumption function is represented by C= 10 + 2y, calculate all the values of C for Y= 0,5,10, and 20 Solution: Substitute the different values of Y in the example below: If Y= 0, then C= 10/2(0) = 20 Other values for C as Y is substituted are 30,50 [MEASURE OF DISPERSION] Measures of disperion or Measure of variability helps to measure how values are spread out or clustered in a distribution. These measures are: a. Range b. Mean Deviaiton c. Standard Deviation d. Variance a. Range This is the simplest measure of dispersion. It is simply the difference between the highest value and the lowest value in a distribution. It I highly influenced by extreme values. [Example:] Determine the range in the following set of data: 18,24,15,19,33,27,14,30,41,32,53,14,9,26,24,25. [Solution]: Highest value= 53 Lowest value= 9 Range= 53-9=44 b. Mean Deviation This is the arithmetic mean of all absolute deviaitons (i.e differences) of the various values in a distribution. The formula is thus: Mean deviation= E1x = x1/n or Ed/n Where E= summation X= the values of observation \- X= the mean of values of x N= number of observations [Example 1] The quantity of egg demanded by consumers ina week is shown in the following distribution: 3,4,5,8,6,7,8, and 10. Calculate the mean deviation [Solution] First thing to do is to find the arithmetic mean of the values. Arithmetic mean (x)= Ex/n= 3+4+5+6+7+8+10/8 = 48/8 = 6 Substract each value of x from the mean Find the sum of all the absolute deviaitons fromt the mean Divide the sum by the number of observations All these are illustrated in the table below