MBCQ721D - QuantitativeTechniques For Management Applications

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Course Design
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Advisory Council
Chairman
Mr. Utpal Ghosh
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Members
Dr. S J Chopra Dr. Deependra Kumar Jha

Chancellor Vice Chancellor
Dr D N Pandey Dr Kamal Bansal Dr Tabrez Ahmad

Dean-SoB Dean-SoE Dean-SoL
Mr Ashok Sahu
Head-CCE
SLM Development Team

Dr Raju Ganesh Sunder Mr. Aindril De
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Head-Academic Unit Head-Operations
Dr. Rajesh Gupta Dr. Meenakshi Sharma Dr. Rakhi Dawar
Mr. Rahul Sharma Mr. Shantanu Trivedi Ms. Aparna
Author
Dr. Rajesh Gupta
All rights reserved. No Part of this work may be reproduced in any form, by mimeograph or any other
means, without permission in writing from University of Petroleum & Energy Studies.
Course Code: MBCQ 721D

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Course Name: Quantitative Techniques for Management Applications
Version: January 2018

© University of Petroleum & Energy Studies
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Contents
Block–I
Unit 1: Quantitative Techniques: An Introduction ....................................................................3
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Unit 2: Decision Making ............................................................................................................11
Unit 3: Introduction to Matrices ...............................................................................................21
Unit 4: Mathematical Operations on Matrices .........................................................................25
Unit 5: Case Study: Nataraj and Sons Cost And Production Analysis ...................................29
Block–II
Unit 6: Determinants .................................................................................................................37

Unit 7: Functions .......................................................................................................................53
Unit 8: Equations .......................................................................................................................61
Unit 9: Progression ....................................................................................................................65
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Unit 10: Case Study: Analyzing The Demand of E-Books .........................................................73
Block–III
Unit 11: Forecasting ....................................................................................................................79
Unit 12: Introduction to Statistics ..............................................................................................93
Unit 13: Statistics ......................................................................................................................101
Unit 14: Graphical Representation of Data ..............................................................................105
Unit 15: Case Study: Analysis of Seasonality in Sales ............................................................109
Block–IV
Unit 16: Central Tendency of Data ...........................................................................................113

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Unit 17: Measures of Dispersion ...............................................................................................119

Unit 18: Applications of QT in Research Techniques/Operations Technique.........................123
Unit 19: Linear Programming ...................................................................................................135
Unit 20: Case Study: On Road to Achieve Optimal Production: Gys Chemicals ....................141
Content
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Block–V
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Unit 21: Transportation Model..................................................................................................145
Unit 22: Assignment Model .......................................................................................................155
Unit 23: Game Theory ...............................................................................................................159
Unit 24: Simulation....................................................................................................................167
Unit 25: Case Study: SM Textiles – Decoding Transportation Model ....................................177
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BLOCK–I
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Detailed Contents
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UNIT 1: QUANTITATIVE TECHNIQUES: AN UNIT 3: INTRODUCTION TO MATRICES
INTRODUCTION
ll Introduction
ll Introduction
ll Summary
ll Meaning of Quantitative Techniques
ll Review Questions
ll Classification of Quantitative Techniques
ll Role of QT in Business and Industry UNIT 4: MATHEMATICAL OPERATIONS
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ON MATRICES
ll Summary
ll Introduction
ll Review Questions
ll Summary
UNIT 2: DECISION MAKING ll Review Questions
ll Introduction
UNIT 5: CASE STUDY: NATARAJ AND SONS COST
ll Steps in Decision Making Process AND PRODUCTION ANALYSIS
ll Decision Environments
ll Summary
ll Review Questions
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3
Unit 1
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Notes
Quantitative Techniques:
___________________
___________________
An Introduction ___________________
___________________
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Objectives: ___________________
After completion of this unit, you will be able to explain:
___________________
\l The meaning of QT
___________________
\l Classification of QT
\l Role of QT in business and industry ___________________
___________________
Introduction ___________________
Our world, the real world, does not give us information which is
readily available for us to use and derive answers from. We use
calculations, quantitative techniques and many other things to
come to a conclusion for a certain thing. However, if the data is
not available to us, it will be hard for us to get the actual results.
To illustrate this, let’s take an example of a television show. If the
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show makers want to know how many people watch that partic-
ular show, they will have to perform an extensive survey, which
will not only require money but also time. Another example is that
of a consumer protection agency who aims at knowing the actual
proportions and characteristics of some drugs in the market, the
information required by the agency will not be readily available for
them. As a result, various occurrences in the results and the meth-
ods of calculations, various quantitative and statistical methods
have developed.
Quantitative techniques help managers in various domains like

Marketing, Human Resource Management, Production and Oper-
ations Management and Financial Management to make effective
decisions. Today, these techniques are also used in military, commu-
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nication and advanced defense planning.
Quantitative techniques are extensively used in making decisions

pertaining to business for the reasons mentioned below:
(i) Availability of a variety of quantitative tools to analyze intri-

cate managerial difficulties.
Quantitative Techniques for Management Applications
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(ii) Accessibility of latest technology (high-speed computers/supe-
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Notes
rior algorithms), to simulate quantitative representations and
___________________ map them to real-life problems.
___________________ (iii) The complexity of today’s business dynamics, which pose se-
___________________ vere challenges in managerial activities involving situation
___________________
analysis, objective setting, seeking alternatives, implementa-
tion, coordination and evaluation of decisions.
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___________________
The fore mentioned points substantiate the importance of quanti-
___________________
tative techniques but don’t eliminate the qualitative approach or
___________________ judgment ability of the decision maker. The perfect solution to any
___________________ complex business situation is a combined approach of quantitative
___________________
as well as qualitative techniques.
___________________
Meaning of Quantitative Techniques
Quantitative techniques refer to the statistical and mathematical
techniques which help the decision maker to take an informed, eval-
uated and result in oriented decision for any given problem at hand.
Quantitative methods or techniques are the methods used by a de-

cision maker to draw out results after evaluating various aspects
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of the research subject. These methods give a result or a conclusion
after analysis of the numbers. The methods may include polls, ques-
tionnaires, and surveys.
Classification of Quantitative Techniques

For convenience of understanding, Quantitative techniques can be
distinguished into following types:
● Quantitative Techniques based on mathematical calculations
● Quantitative Techniques based on statistical calculations
● Quantitative Techniques based on programming
1. Quantitative Techniques based on mathematical calcu-

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lations: The techniques that use mathematical principles to

analyze the quantitative data. It involves:
(i) Combinations and Permutations: The term “permu-

tation” implies the possible representation of the vari-
ous items that have been selected in an order. The total
number of the arrangements in the order is and will be
Unit 1: Quantitative Techniques: An Introduction
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directly proportional to the total quantity of items used
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at the time of creation of the order. Combination focuses Notes
on selecting the objects without considering the order in ___________________

which they are selected. ___________________
(ii) Set Theory: Set theory is a branch of quantitative tech- ___________________
niques which deals with the collection of objects.
___________________
(iii) Matrix Algebra: A matrix can be described as represen-
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___________________
tation of particular variables and numbers in different
columns and rows. Matrix is a mathematical tool that ___________________
is used to identify different types of algebra calculations ___________________

by making use of the numbers and variables given in the
___________________
various rows and columns.
___________________
(iv) Determinants: It is a useful value that can be comput-
ed from the elements of a square matrix. Apart from its ___________________
application in calculus, it can also be used to represent

complex polynomial in a simpler form.
(v) Differentiation: Differentiation is a complex mathemat-
ical operation which allows you to find out the results of a
minor change in an independent variable on a dependent
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variable in the equation.
(vi) Integration: Integration can be defined as the converse
procedure of differentiation.
(vii) Differential Equation: It is a mathematical equation
that encompasses the differential factors of the depen-
dent variables.
2. Quantitative Techniques based on statistical calculations:

use various statistical tools to analyze a given set of data. These
tools analyse different forms of data over same or different time
periods and thus help in making better decisions. This involves:
(i) Collection of Data: It is the first and foremost step for

any statistical method. Primary and secondary data collec-
tion involves varied techniques.
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(ii) Measures of Dispersion, Kurtosis, Central Tendency,

and Skewness:
(a) Central Tendency: This technique provides us with

an estimation of the concentration of the values of the
central part of a certain distribution. There are five
methods of finding this out:
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● Arithmetic Mean or Simple Mean
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Notes
● Mode
___________________
● Geometric Mean
___________________
● Harmonic Mean
___________________
● Median
___________________
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___________________ (b) Dispersion: Literal meaning of dispersion is “Scat-
teredness. ”As per the statistician, Spiegel, dispersion
___________________
or variation is defined as “the degree to which the nu-
___________________ merical data tend to spread about an average value.”
___________________ Dispersion can be measured in different ways:
___________________ ● Mean Deviation
___________________ ● Range
● Standard Deviation and Variation
● Quartile Deviation
(c) Skewness: Skewness means ‘Lack of symmetry.’ The

study of skewness is done to understand how to shape
the curve with a given data. The data can be said to
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have positive skewness, negative skewness, and zero
skewness.
(d) Kurtosis: Kurtosis enables us to understand the

‘peakedness or flatness’ of the curve when formed
from a given set of data.
(iii) Correlation and Regression Analysis: Linear rela-

tionship amongst two or more variables can be analysed
with the help of Correlation. Whereas, usage of a variable
is used for estimation of value of another variable under
regression.
(iv) Index Numbers: Rightfully described as economic ba-

rometers, these numbers allow us to measure and analyze
the fluctuations of various things such as price, production
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and various other things, for a given time period. It is be-

cause of its ability to give results for fluctuations; Index
Numbers is an integral part of Statistics.
(v) Time Series Analysis: This technique is used for under-

standing regarding effects of factors which are responsible
for a change during a given period.
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(vi) Interpolation and Extrapolation: Interpolation is a
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statistical technique which is used for estimation of par- Notes
ticular things under assumptions for missing statistics ___________________

that fall within the range of given figures. On the other ___________________
hand, for estimated figures which fall outside range of a
___________________
given data are Extrapolation is used.
___________________
(vii) Statistical Quality Control: It is an industrial stan-
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dard, which is used to measure the quality of goods and ___________________
services. It can also be used for measuring as well con- ___________________

trolling the quality of services. Various charts are em-
___________________
ployed for calculations related to product quality.
___________________
(viii) Ratio Analysis: It is a method used for analysis of fi-
___________________
nancial statements and evaluates the industrial aspects
of the company, business or industry. It also helps in com- ___________________
paring two data in different units.
(ix) Probability Theory: It assigns numerical values of the
prospective of an event reoccurring.
(x) Testing of Hypothesis: Testing of the hypothesis is a

crucial part of statistics, it evaluates two statements, to
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determine which of the two statements supports the sam-
ple statements.
3. Programming Techniques: These are the model building

techniques which use computer-based languages to write algo-
rithms used by decision makers to solve the problem and in-
clude the following:
(i) Linear Programming: is a mathematical method to

evaluate the best outcome from a mathematical model ex-
pressed in linear equations.
(ii) Queuing Theory: is a study of queues or lines through

mathematical techniques. It offers the waiting time or the
service time of a given line or queue.
(iii) Game Theory: The mathematical model of the game the-

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ory is the study of two or more players to get an outcome

while keeping in mind the various rules and conditions. It
is a model used by reasonable decision makers to find the
best outcome.
(iv) Decision Theory: Decision theory is a mathematical

model which helps in evaluating optimal decision mak-
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ing for various situations by ascertaining various levels
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Notes of risks or expectations of the situation.
___________________
(v) Inventory Theory: Inventory theory, a mathematical
___________________ model, is used to evaluate and design the best produc-
___________________ tion or inventory system, which minimizes the cost for
the business.
___________________
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___________________ (vi) Network Programming: It is the method that compris-
es of controlling, forecasting, monitoring and harmoniz-
___________________
ing complex and vast tasks comprising of many activities
___________________ and events. This helps in the allocation of resources, ad-
___________________ justment of times and helps in gaining an effective cost
system.
___________________
___________________ (vii) Simulation: Is used for testing such a model that it re-
sembles certain practical situations.
(viii) Nonlinear Programming: The nonlinear programming

is the mathematical technique of finding the optimum
solutions while considering various equalities and in-
equalities of the variables over real variables.
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Role of QT in Business and Industry
With the advent of technology and complexity in the business space,
role of quantitative techniques has witnessed increased interest
from business managers. For example:
Example 1.1: If a company which has already launched a product

a while ago, that’s close to its saturation stage in the product lifecy-
cle, decides to launch another product B in the market, should the
company launch the product B now, or should they use the existing
funds to revive the market share of product A as it is already a
well-known product? This business problem can be solved through
different quantitative techniques:
● Cost-Benefit Analysis: The Company can conduct a cost-ben-

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efit analysis to compare the total cost required for products A

and B and then take an informed decision. To perform cost-ben-
efit analysis, the company can use different mathematical and
statistical models.
● Gather market data to gauge target customer’s interest in the

new product. Several quantitative and statistical techniques
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like hypothesis testing, sample surveys, etc. can be used to an-
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alyze and assist in decision making. Notes
___________________
● Various statistical models like factor analysis and cluster sam-
pling can be done to understand the reach of old product vis-a- ___________________
vis the new product. ___________________
● Financial models can be constructed using linear programming ___________________
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techniques which can evaluate the optimum amount of cost and ___________________
the maximum amount of profit.
___________________
Hence, from the above, we can deduce that quantitative techniques ___________________
are not limited to a particular department in the organization but
___________________
form an integral part of decision making in many real-life scenarios
as well. ___________________
___________________
Below are the management areas where quantitative techniques are
extensively used:
(i) Marketing:
(a) Market research analysis.
(b) Statistical details of records for upkeep of a vast market.

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(c) Sales planning and projections.
(ii) Production:
(a) Controlling and planning production.

(b) Performance evaluation of a machine.
(c) Requirements for control of quality.
(d) Measures for Inventory control.
(iii) Accounting, Investment and Finance:
(a) Preparing budgets and forecasting about financial perfor-

mance.
(b) Decisions regarding financial investment.
(c) Securities selection.

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(d) Carrying out Audit.
(e) Credit policies, delinquent accounts and credit risk.
(iv) Personnel:
(a) Turnover rate of Labour.

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(b) Trends regarding employment.
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Notes
(c) Appraisal of Performance.
___________________
___________________ (d) Rates of wages and plans for incentives.
___________________
Summary
___________________
This unit provides in-depth understanding of different quantita-
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___________________
tive techniques employed in the realm of management of business.
___________________ Quantitative techniques are widely applied in business and man-
___________________ agement due to the complicatedness and essentiality of decision
making process. Users of such techniques get the motivation for
___________________
discovering more sophisticated data analysis techniques, thanks to
___________________ progress in computer technology. But it must be noted that though
___________________ decision making makes use of quantitative techniques, there is still
scope for qualitative ability of a decision maker.
Review Questions
1. What are the different mathematical techniques used for quan-
titative analysis? Explain each by using a business example.
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2. What are the practical applications of quantitative techniques?
3. What are the key differences between mathematical, statistical

and programming techniques of quantitative analysis?
4. How are quantitative techniques used in complex business sce-

narios for better decision making?
5. What are programming techniques and explain how its fea-

tures are useful in business environments?
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Unit 2
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Notes
Decision Making
___________________
___________________
___________________
Objectives:
___________________
After completion of this unit, you will be able to:
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___________________
\l Explain the stepwise process of decision making and elaborate on deci-
sion environment. ___________________
\l Explain decision making in regard to certainty and uncertainty.
___________________
\l Explain the decision-making process when subjected to risk.
___________________
\l Explain the different techniques and calculations related to decision mak-
ing. ___________________
___________________
Introduction
Decision making is termed as careful selection of the most viable
option available among various alternatives. It involves the act of
making a choice. Decision making is an important function of a busi-
ness. It helps the business in evaluating different alternatives be-
fore choosing the one that best suits their requirement. Moreover,
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many managerial functions like planning, organizing, directing, and
staffing cannot be implemented effectively without proper decision
making. It also helps in evaluating managerial performances. Any
policy or plan introduced in an organization is the outcome of deci-
sion making.
There are various steps and conditions under which decision making
is done, and those are described during the course of this chapter.
Steps in Decision Making Process

The process of decision making involves following steps:
● Identifying the problem that requires a decision: The first and
foremost step is to define the problem. It involves identifying
the factors that are acting as hurdles in the way of effective
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decision making.
● Defining criteria for choosing alternatives: This involves deter-
mining the aspects of the problem. On the basis of these as-
pects, alternatives are needed to be defined.
● Identifying all alternatives: This involves identifying the alter-
natives that are available to resolve a particular problem.
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● Analysing and comparing alternatives on the basis of defined
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Notes
criteria (using quantitative and qualitative techniques: Once
___________________ the alternatives available to solve the problem are identified,
___________________ it becomes important to analyse each alternative. This helps
in assessing the best possible alternative. It also helps in the
___________________
comparison of all the alternatives.
___________________
● Selecting the best alternative as per defined criteria: After ana-
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___________________
lysing all the alternatives, it is required to select the best alter-
___________________ native as per the defined criteria considered in the second step.
___________________
___________________
Decision Environments
___________________ There are 3 types of environments in which decision are made by
business managers:
___________________
● Certainty: An environment where there exists only one out-

come for a decision which is known with certainty, that is, there
is complete certainty about future.
● Uncertainty: An environment where there exists more than

one outcome for a decision and their probabilities are unknown.
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● Risk: An environment where there can be several outcomes
but the probability of different outcomes can be stated objec-
tively using past data/available information.
Now let us learn these environments in detail with the help of ex-
amples.
(a) Decision Making under Certainty: It is a condition in which

the outcomes of all alternatives are known with complete cer-
tainty. It is also referred as the Deterministic environment.
For example Treasury Bill/Government Bonds as investment

instruments are the safest bets where we are almost certain of
the return.
(b) Decision Making under Uncertainty: In this environment,

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as the decision maker lacks the information of probability of

occurrence, there exit few decision criteria which help decision
maker to make an informed decision. For example: Launching
a new product in the market without knowing its possible re-
sponses in the market from the customers.
Unit 2: Decision Making
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Notes
Maximax Criterion
Criteria of Optimism ___________________
___________________
___________________
Maximin Criterion
Criteria of Pessimism ___________________
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___________________
Laplace Criterion ___________________

Decision Making under Uncertainity
Criteria of Rationality
___________________
___________________
Minimax Criterion
Criteria of Regret ___________________
___________________
Hurwicz Criterion
Criteria of Realism
Figure 2.1: Decision Making under Uncertainty

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1. Maximax: The alternative with the highest of highest
payoffs is selected. This is considered as the most opti-
mistic outcome.
Example 2.1.1: Consider the payoff table displayed below:
Table 2.1: Payoff Table 1
Alternative/
market Payoff
High Moderate Low
1 50 40 10
2 20 60 20
3 30 40 5
Identify the maximum payoff for each alternative

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Alternative / Payoff Maximum

market High Moderate Low Payoff
1 50 40 10 50
2 20 60 20 60
3 30 40 5 40
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The maximum of maximum payoff is 60 for alternative 2.
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Notes So, basedon Maximax principle, alternative 2 is prefera-
___________________ ble.
___________________ 2. Maximin: The alternative with the best of the worst pos-
___________________ sible payoffs is selected. This is considered as a pessimis-
tic approach.
___________________
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___________________ Example 2.1.2: Consider Table 2.1: Payoff Table given above.
___________________ Identify the minimum payoff for each alternative
___________________
___________________
Alternative / Payoff Minimum
___________________ market High Moderate Low payoff
___________________ 1 50 40 10 10
2 20 60 20 20
3 30 40 5 5
The maximum of minimum payoff is 20 for alternative 2. So, based

on Maximin principle, alternative 2 is preferable.
3. Laplace: Since the decision maker doesn’t know the

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probability of an event, an equal probability is assigned
to all the possible outcomes. Thereafter, the alternative
with the best average payoff is selected.
Example 2.1.3: Consider Table 2.1: Payoff Table given above.
Calculate average expected payoff for each alternative
Alternative / Payoff Average

market High Moderate Low payoff
1 50 40 10 33.3
2 20 60 20 33.3
3 30 40 5 25
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The maximum of average payoff is 33.3 for alternatives 1 and 2.

So, based on Laplace principle, alternative 1 and 2 are equally
preferable.
4. Minimax regret: The alternative that has the smallest

of the highest regrets is selected. It is known as the op-
portunity loss decision criterion as well. Example 2.1.4:
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Consider Table 2.1: Payoff Table given above.
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Notes
This method determines the regret for the alternatives associated
___________________
with each future state of nature.
___________________
The opportunity loss for each pair is the result of the difference be-
___________________
tween the payoff of the specific combination and the highest payoff
for that particular state of nature. ___________________
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___________________
___________________
Alternative/ Payoff
___________________
market High Moderate Low
1 50 40 10 ___________________
2 20 60 20
___________________
3 30 40 5
___________________
The regret for alternative 1 will be:
50 – 50 = 0 for high market
60 – 40 = 20 for moderate market
20 – 10 = 10 for low market

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The regret table is then created, and maximum regret for each alter-
native is identified.
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Regret
Alternative High Moderate Low Maximum
1 0 20 10 20
2 30 0 0 30
3 20 20 15 20
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The decision is made based on a minimum of maximum regret. So,
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Notes alternatives 1 and 3 are equally preferable, as they have the lowest
___________________ regret of 20.
___________________ 5. The criterion of Realism or Hurwicz criterion: This
___________________ is also known as a weighted average criterion and is a
mix of Maximax and Maximin criteria. Based on the pos-
___________________
sible outcome, a degree of optimism x is chosen. Hence
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___________________
(1-x) is the degree of pessimism. Both the optimistic and
___________________ pessimistic degrees are multiplied with maximum and
___________________ minimum payoffs respectively to yield the value of the
outcome. The outcome with highest calculated value is
___________________
selected.
___________________
Example 2.1.5: Consider Table 2.1: Payoff Table given above.
___________________
Let us choose x (degree of optimism) is 0.6. Hence the degree of pes-
simism will be 0.4
The expected payoff will be 0.6*Maximum Payoff + 0.4* Minimum

Payoffs.

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Alternative / Payoff Expected
market High 1/3 Moderate 1/3 Low 1/3 value
1 50 40 10 34
2 20 60 20 44
3 30 40 5 26
Expected value for alternative1 = (0.6*50) + (0.4*10) = 34
The maximum of expected value is 44 for alternative 2, which will

be the preferred alternative as per Hurwicz Criterion.
(c) Decision Making Process under Risk: Under the conse-

quences of risk, the decision maker has access to sufficient data
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that helps in the assignment of a probability to each state in

case of multiple outcomes. These probability details can either
be obtained from historical data or by taking a subjective judg-
ment by the decision maker.
There are 3 decision criteria for taking a decision under Risk.

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Notes
Expected Value Criterion/
Expected Monitory Value criterion
___________________
(EMV)
___________________
Expected Opportunity Loss ___________________

Decision Making under Risk Criterion (EOL)/ Expected value
of regret ___________________
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___________________
Expected Value for Perfect
Information (EVPI) ___________________
___________________
Figure 2.2: Decision Making under Risk
___________________
Expected Value Criterion/Expected Monetary Value (EMV) ___________________
The expected value is the anticipated value for a particular invest- ___________________
ment. It is defined as the summation of all feasible payoffs for the
alternatives. The Expected Value (EV) is the product of all feasible
outcomes with their probabilities of occurrence followed by the sum-
mation of all the values.
Expected values assist the investors in choosing the most suitable

condition that results in the expected outcome.
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The concept of expected value can be explained better with the help
of a basic example.
For determining the expected value for a single discrete and random
variable, the very first thing would be to conduct the multiplication
of the value of the given variable by its probability. Consider the ex-
ample of a normal six-sided die. On rolling the die, there will be the
1/6th possibility of considering 1, 2, 3, 4, 5, or 6. For
the given information, the calculation will be as follows:
æ1 ö æ1 ö æ1 ö æ1 ö æ1 ö
= ç ´ 1 ÷+ ç ´ 2 ÷+ ç ´ 6 ÷+ ç ´ 5 ÷+ ç ´ 6 ÷
è6 ø è6 ø è6 ø è6 ø è6 ø
= 3.5
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So, on rolling a six-sided die for an infinite number of times, the av-
erage value will be 3.5.
Example 2.2: A marketing manager needs to determine in which

region should a new product be launched? The level of sales along
with the associated probabilities is categorized as High (0.3), Aver-
age (0.5) and Low (0.2). Below is the payoff matrix
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Notes
Event
___________________ Action High (0.3) Average (0.5) Low (0.2)
___________________ North India (A) Rs 50,000 Rs 30,000 Rs 10,000
South India (B) Rs 60,000 Rs 25,000 NIL
___________________
___________________ EMV Calculation
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___________________ EMV (A) = 0.3 (50,000) + 0.5(30,000) + 0.2(10,000) = Rs 32,000
___________________ EMV (B) = 0.3 (60,000) + 0.5(25,000) + 0.2(0) = Rs 30,500
___________________ North India (A) will be the preferable region where the marketing
___________________ manager should launch the new product as it will result in higher
payoffs.
___________________
___________________ Expected Opportunity Loss Criterion

Expected Opportunity Loss Criterion denotes the reduction of max-
imum profits in case of the decision maker choosing an alternative.
Taking the same example to explain it further:
Event
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Action High (0.3) Average (0.5) Low (0.2)
North India (A) Rs 50,000 Rs 30,000 Rs 10,000
South India (B) Rs 60,000 Rs 25,000 NIL
The regret for alternative A will be:

High – 10,000
Average – 0
Low – 0
The regret for alternative B will be:
High – 0
Average – 5,000
Low – 10,000
The Opportunity Loss Table will be:
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Opportunity Loss Table

Action High (0.3) Average (0.5) Low (0.2) Expected
opportunity
loss
North India (A) Rs. 10,000 NIL NIL 3,000
South India (B) NIL 5,000 10,000 4,500
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As EOL is lower in region A, the decision maker should prefer North
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India (A) for launching the product as per EOL analysis. Notes
___________________
Expected Value for Perfect Information (EVPI)
___________________
This criterion is based on the fact that the decision maker can get
___________________
the perfect information which is complete and accurate and hence
removes all the uncertainty for the future event. ___________________
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___________________
EVPI is calculated by subtracting the maximum expected monetary
value from the expected profit from the perfect information. ___________________
Example: Find out the expected value for the optimum payoff asso- ___________________
ciated with each state of nature. Further, conduct the subtraction of ___________________
the optimal decision from the expected value.
___________________
EVPI = .4(10,000) + .2(18,000) + .4(21,000) – 14,000 = $2,000 ___________________
Solution: The expected value for the optimum payoff and the result
after subtracting the optimal decision is displayed in the table be-
low:
A B C D E F
1
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2
3 Decision State of Nature Expected Recommendation
4 Alternatives s1 = 80 s2 = 100 s3 = 120 Value
5 d1 = Model = A 10,000 15,000 14,000 12,600
6 d2 = Model = B 8,000 18,000 12,000 11,600
7 d3 = Model = C 6,000 16,000 21,000 14,000 d3 = Model = C
8 Probability 0.4 0.2 0.4
9 Maximum Expected Value 14,000
10
11 Maximum Payoff EVwPI EVPI
12 10,000 18,000 21,000 16,000 2,000
Summary
Management requires apt decision making. It is a methodical and
standard approach to the process of decision making that calls for
the application of scientific methods. Decision making may involve
(c
decisions under certainty or uncertainty, under various conditions,

such as static and dynamic, and against nature or some rational op-
ponent. In the process of decision making, qualitative factors must
be given due importance along with the quantitative factors of a
problem.
20
Quantitative analysis or operations research gives a methodical and
S
Notes standard approach to decision making. Decision making, scientific
___________________ approach, objectivity, inter-disciplinary approach and the use of dig-
___________________ ital computers are features of operations research. The methodology
used in operations research consists of a formulation of the problem,
___________________
building the model, collecting data, a solution of the model and in-
___________________ terpreting the results, validating the model and implementing the
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___________________ solution achieved.
___________________
Review Questions
___________________
1. Consider the payoff table displayed below:
___________________
___________________
Alternatives Profit if future demand is
___________________
Low Medium High
X 10 50 70
Y –10 44 120
Z 0 20 140
Which alternative you would choose based on:
(a) Maximin
)U
(b) Maximax
(c) minimax regret
(d) HurwiczCriterion
2. Which option will be selected by the decision manager?
(a) Option 1 with low EVPI
(b) Option 2 with high EVPI
3. In Hurwitz criterion, if the degree of optimism X is,
(a) X = 1, what will the output be equal to? Maximax output/

Maximin output?
(b) X = 0, what will the output be equal to? Maximax output/

(c
Maximin output?
4. Give 3 practical examples of decision making in certainty?

21
Unit 3
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Notes
___________________
Introduction to Matrices ___________________
___________________
Objectives:
___________________
After completion of this unit, you will be able to explain the following:
PE
___________________
\l What Matrix is
\l Size of a Matrix ___________________
\l Types of Matrices ___________________
___________________
Introduction
___________________
Matrix is a rectangular array of related values. It is represented by ___________________
values arranged in columns and rows, covered by brackets.
The matrix can be represented as:
æ 40 30 ö
ç ÷
è 25 30 ø
The matrix may be used for representing several types of values.

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Male Female Child
Family1 æ 2 2 3ö
ç ÷
Family 2 è 3 2 1ø
Protein Vitamin Fats
Diet 1 æ 20 12 5ö
ç ÷
Diet 2 è 35 6 8ø
Size of a Matrix
Size of the matrix is defined by m × n
Where m = number of rows
n = number of columns
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Example: 2 × 2 Matrix
æ 40 30 ö
ç ÷
è 25 30 ø
2 × 3 Matrix
æ 20 12 5 ö
ç ÷
è 35 6 8 ø
22
Types of Matrices
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Notes
___________________ (a) Square Matrix: A Square Matrix is a framework of an equal

___________________
number of rows and columns.
___________________ æ 400 310 250 ö

ç ÷
___________________ ç 251 305 206 ÷
ç 210 220 165 ÷ 16
è ø
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___________________
(b) Row Matrix: A matrix with a single row.
___________________
(21 22 16 )
___________________
___________________ (c) Column Matrix: A matrix with only one column.
___________________ æ 40 ö
ç ÷
___________________ ç 25 ÷
ç 20 ÷
è ø
(d) Diagonal Matrix: Diagonal Matrix is defined as a matrix in

which all the non-diagonal elements are zero.
æ 400 0 0 ö
ç ÷
ç 0 305 0 ÷
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ç 0 0 165 ÷ø
è
(e) Scalar Matrix: Scalar matrix is a matrix that is so called when

all its diagonal elements are equal.
æ115 0 0 ö
ç ÷
ç 0 115 0 ÷
ç 0 0 115 ÷ø
è
(f) Identity Matrix: When the diagonal elements of a matrix

stand equivalent to 1, then the matrix so formed is called Iden-
tity Matrix.
æ1 0 0 ö
ç ÷
ç0 1 0÷
(c
ç0 0 1÷
è ø
(g) Similar Matrices: Matrices of same size are termed as Simi-
lar Matrices.
æa bö æw x ö
ç ÷ ç ÷
è c dø è y zø
Unit 3: Introduction to Matrices
23
(h) Upper Triangular Matrix: An Upper Triangular Matrix is
S
a type of square matrix which has all the elements above the Notes
diagonal row equivalent to 0. ___________________
æ a b cö ___________________
ç ÷
ç 0 d c÷ ___________________
ç 0 0 1÷
è ø ___________________
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(i) Lower Triangular Matrix: A square matrix in which all ele- ___________________
ments above the diagonal row are zero. ___________________
æa 0 0ö ___________________
ç ÷
ç f b 0÷ ___________________
ç e d c÷
è ø ___________________
(j) Symmetric Matrix: A symmetric matrix is a type of square ___________________

matrix which has the same corresponding elements positioned
with respect to the diagonal. The diagonal works as a mirror
and therefore aij becomes equal to aji, where aij is known as
the element situated in the ith row and jth column for all values
of i and j. In a matrix, the entries are typically named as “aij,”
where “i” denotes the row and “j” refers to the column.
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æa f e ö
ç ÷
ç f b d÷
ç e d c÷
è ø
(k) Skew Symmetric Matrix: Skew-symmetric matrix is a cat-

egory of a square matrix in which the corresponding elements
positioned with respect to the diagonal are then negative values
of each other. Therefore aij is equivalent to –aji in this matrix,
where aij is the element situated in the ith row and jth column of
the matrix. The skew-symmetric matrix always has the value 0
for all their diagonal elements.
⎛ 0 f e⎞
⎜ −f 0 d⎟
⎜ ⎟
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⎝ −e −d 0 ⎠
(l) Transpose of a Matrix: The interchangeability of the default

rows and column of a matrix gives rise to a new matrix called
Transpose.
The transpose of
24
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æa b c ö
Notes A=ç ÷
èf e d ø
___________________
æa f ö
___________________ ç ÷
A = çb e ÷
T
___________________ çc d ÷
è ø
___________________
Summary
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___________________
___________________ This chapter covers the concept of the matrix and its dimensions.
___________________ Matrix is a rectangular array of related values represented by val-
ues arranged in columns and rows, covered by brackets. Matrices
___________________
are used in several ways to solve the systems of equations. Matrix
___________________ holds an important position in higher algebra. Most of the linear al-
___________________ gebra that is taught in college has a significant part denoted to ma-
trices. Matrices are vastly used in the organization of data and the
study of complicated phenomena. For instance, matrices are widely
used for the determination of population growth and stabilization.
Review Questions
1. What are the different types of matrices?
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2. Will transpose of a symmetric matrix be different from the orig-
inal matrix?
3. Define a lower triangular matrix.
4. Will transpose of a skew-symmetric matrix be skew-symmetric

in nature?
5. What type of matrix will be the output of the product of two 3x3
lower triangular and upper triangular matrices?
(c
25
Unit 4
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Notes
Mathematical Operations
___________________
___________________
on Matrices ___________________
___________________
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Objectives: ___________________
___________________
\l Addition of Matrices
___________________
\l Subtraction of Matrices
\l Scalar Multiplication of Matrices ___________________
\l Multiplication of Matrices ___________________
___________________
Introduction
A basic mathematical operation like addition, subtraction, and mul-
tiplication of matrices can be applied to matricies. Here we will learn
situations/conditions where these are applied.
Addition of Matrices
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The possibility of conducting the addition of matrices holds true
when the matrices are of equal size.
The corresponding elements of both the matrices are added up.
Size of the resultant matrix is equal to the size of added matrices.
A+B=B+A
æa b ö æw x ö æa + w b + x ö
ç ÷+ ç ÷= ç ÷
èc d ø è y z ø è c + y d + z ø
æ3 5 ö æ4 9 ö æ7 14 ö
ç ÷+ ç ÷= ç ÷
è1 0 ø è5 7 ø è6 7 ø
Subtraction of Matrices
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Subtraction of matrices is only possible if the size of matrices is

equal.
All elements of matrix 2 are subtracted from the corresponding ele-

ments of matrix 1.
Size of the resultant matrix is equal to the size of added matrices.

26
A−B≠B–A
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Notes
___________________ The result obtained from the subtraction of matrix B from matrix A
is not equal to the result obtained from the subtraction of matrix A
___________________
from matrix B.
___________________
æa b ö æw x ö æa - w b - x ö
___________________ ç ÷- ç ÷= ç ÷
èc d ø è y z ø è c - y d - z ø
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___________________
___________________ æ3 5 ö æ4 9 ö æ-1 -4 ö
ç ÷- ç ÷= ç ÷
___________________ è1 0 ø è5 7 ø è-4 -7 ø
___________________
æ4 9 ö æ3 5 ö æ1 4 ö
ç ÷- ç ÷= ç ÷
è5 7 ø è1 0 ø è4 7 ø
___________________
___________________
Scalar Multiplication of Matrices
When a matrix is multiplied by a constant, each element of the ma-
trix is multiplied by the constant to get the resultant matrix.
æa b ö æka kb ö
kx ç ÷= ç ÷
èc d ø èkc kd ø
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æ4 9 ö æ20 45 ö
5´ç ÷= ç ÷
è5 7 ø è25 35 ø
Multiplication of Matrices
The possibility of conducting multiplication of two matrices holds
true when the number of columns present in matrix 1 is equal to the
number of rows in matrix 2. This means that the multiplication of
aij is possible with ajk with the resultant matrix being aik. Size of
new matrix = number of rows in matrix 1 × number of columns in
matrix 2.
A×B≠B×A
æa b ö æw x ö æaw + by ax + bz ö
(c
ç ÷´ ç ÷= ç ÷
èc d ø è y z ø è cw + cy dx + dz ø
æ3 5 ö æ4 9 ö æ3 ´ 4 + 5 ´ 5 3 ´ 9 + 5 ´ 7 ö æ37 52 ö
ç ÷´ ç ÷= ç ÷= ç ÷
è1 0 ø è5 7 ø è1 ´ 4 + 0 ´ 5 1 ´ 9 + 0 ´ 7 ø è 4 9 ø
Multiplication of Row Matrix with the Column Matrix

Unit 4: Mathematical Operations on Matrices
27
Two matrices can be multiplied with one another when the dimen-
S
sions are congruent. It must be noted that the number of columns Notes
present in the first matrix should be equal to the number of rows ___________________
present in the second matrix. ___________________
When A = [aij] is an m × n matrix and B = [b] is an n × p matrix, then ___________________

the product AB is an m × p matrix.
___________________
æx ö
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x ç ÷= ___________________
èy ø
___________________
æ3 ö ___________________
(4 3) ´ ç ÷ = (4 ´ 3 3 ´ 2 ) = (18 )
è2 ø ___________________
___________________
Summary ___________________
The study of matrices is incomplete without learning how to apply

the same in mathematical operations. It is very necessary to learn
the addition and subtraction of matrices. There are a few general
rules regarding that which negate the possibility of addition and
subtraction of some matrices. It must be kept in mind that the ad-
dition and subtraction of matrices hold true when they have same
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dimensions.
In matrices, two types of multiplication are conducted- multipli-

cation by a constant and multiplication by two matrices. Matrix
multiplication is stated to be associative but strongly denied to be
commutative. Real numbers possess additive identity and multi-
plicative identity which is similarly seen in matrices. Matrices also
have an additive identity and multiplicative identity. Three basic
row operations are conducted to reduce a matrix. It is used in all
the calculations in matrices. Just as most of the real numbers pos-
ses a multiplicative inverse, most matrices also posses multiplica-
tive inverse.
Review Questions
(c
1. Is it possible to conduct the multiplication of a (2 × 2) matrix

with a (2 × 3) matrix? If so, what would be the size of the matrix?
2. The multiplication of a lower triangular and upper triangular

matrix will result in which type of matrix?
(a) Scalar matrix

28
(b) Diagonal matrix
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Notes
(c) Lower triangular matrix
___________________
___________________ (d) Upper triangular matrix
___________________ 3. What type of matrix will be the output of the product of two
3 × 3 lower triangular and upper triangular matrices?
___________________
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___________________
___________________
___________________
___________________
___________________
___________________
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29
Unit 5
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Notes
Case Study: Nataraj and Sons

___________________
___________________
Cost And Production Analysis ___________________
___________________
A firm, Nataraj and Sons Pvt. Ltd., is a Rajasthan based textile
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company. The main product line of the firm is cloth manufacturing, ___________________
that’s given to wholesalers and retailers. The company deals with
___________________
the production of four line of products, like Sari, Dhoti, Shirts, and
Trousers; requiring a mix of four different materials, like Silk, Cot- ___________________
ton, Nylon and Linen. Below is the requirement (per unit) of each
___________________
product for each material:
___________________
Silk Dhoti Nylon Linon ___________________
Sari é5 3 1 2ù
Dhoti ê ê2 1 7 3ú
ú
W=
Shirts ê3 4 6 1ú
ê ú
Trousers ë1 2 4 7û
Using matrix notations and calculations:

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● find the total amount of each material given that the firm de-
velops:
● 200 units of each product
● 100 units of Sari and Shirts; 250 units of Dhoti and

Trousers
● 200 units of each product
● Given that the per unit cost of Silk, Dhoti , linen,and Nylon
are Rs 5, 15, 4 and 8; determine the per unit cost of producing
each of the products.
● Considering the achieved per unit cost of production in the

above question
● Which is the most profitable product for the company if the

average per unit Selling price of the products is:
(c
Sari – Rs. 100
Dhoti – Rs. 110
Shirts – Rs. 150
Trousers – Rs. 130

contd.
30
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Solution:
Notes
(a) 200 units of each
___________________
___________________
Case: Sari
___________________ 1 unit of sari requires
___________________ ● 5 units of silk
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___________________ ● 3 units of cotton
___________________ ● 1 unit of nylon
___________________ ● 2 units of linen

___________________ For the sake of 200 units of sari, requirements will be:
___________________ ● 1000 units of silk
___________________
● 600 units of cotton
● 200 units of nylon
● 400 units of linen
Case: Dhoti
1 unit of dhoti requires

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● 2 units of silk
● 1 unit of cotton
For the sake of 200 units of sari, requirements will be:
● 400 units of silk
Case: Shirts
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1 unit of shirt requires
● 3 units of silk
● 1 unit of linen
contd.
Unit 5: Case Study: Nataraj and Sons Cost And Production Analysis
31
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Notes
___________________
___________________
___________________
___________________
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Case: Trousers
___________________
1 unit of trouser requires ___________________
● 1 unit of silk ___________________
● 2 units of cotton ___________________
● 4 units of nylon ___________________
● 7 units of linen ___________________

)U
The new matrix for 200 units of each product thus will be
Silk Cotton Nylon Linen

Sari é1000 600 200 400 ù
Dhoti êê 4000 200 1400 600 úú
Shirts ê 600 800 1200 200 ú
ê ú
Trousers ë 200 400 800 1400 û
(b) 100 units of sari and shirts and 250 units of dhoti and trou-
sers
Same as above, the matrix will be:
Silk Cotton Nylon Linen

Sari é500 300 100 200 ù
Dhoti êê500 250 1750 750 úú
(c
Shirts ê300 400 600 100 ú

ê ú
Trousers ë250 500 1000 1750 û
(ii) For 1 unit of Sari:
● 5 units of silk
contd.
32
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Notes
● 1 unit of nylon
___________________
___________________
Multiplying each by their by respective unit cost
___________________
___________________ ● 5 units of silk Rs. 5/unit
PE
___________________ ● 3 units of cotton Rs. 15/unit
___________________ ● 1 unit of nylon Rs. 8/unit
___________________ ● 2 units of linen Rs. 4/unit
___________________ Cost of per unit sari will be
___________________ For 1 unit of Dhoti:

___________________ ● 2 units of silk
● 1 unit of cotton

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● 2 units of silk Rs. 5/unit
● 1 unit of cotton Rs. 15/unit
● 7 units of nylon Rs. 8/unit
● 3 units of linen Rs. 4/unit
Cost of per unit dhoti will be Rs. 86
For 1 unit of Shirt:
● 3 units of silk
● 1 unit of linen

(c
● 3 units of silk Rs. 5/unit
● 4 units of cotton Rs. 15/unit
● 1 unit of linen Rs. 4/unit

contd.
Unit 5: Case Study: Nataraj and Sons Cost And Production Analysis
33
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Cost of per unit shirt will be Rs. 127
Notes
For 1 unit of trouser:
___________________
● 1 unit of silk
___________________
___________________
___________________
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___________________
___________________
● 1 unit of silk Rs. 5/unit
___________________
● 2 units of cotton Rs. 15/unit
___________________
___________________
● 7 units of linen Rs. 4/unit
___________________
Cost of per unit trouser will be Rs. 95 unit
Now, calculate the profit incurred on each product:
Sari = Rs. 100 – Rs. 86 = Rs. 14
Dhoti = Rs. 110 – Rs. 93 = Rs. 17
Shirt = Rs. 150 – Rs. 27 = Rs. 23

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Trouser = Rs. 130 – Rs. 95 = Rs. 35
It is clear from above calculation that
Profittrouser > Profittrouser > Profittrouser > Profittrouser
Hence, Trouser is the most profitable product for the company.

(c
(c
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BLOCK–II
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(c
Detailed Contents
S
UNIT 6: DETERMINANTS ll Linear Equations
ll Introduction ll Roots of Linear Equations
ll Main Properties of Determinants ll Quadratic Equation
ll Applications in Management ll Summary
ll Summary ll Review Questions
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ll Review Questions
UNIT 9: PROGRESSION
UNIT 7: FUNCTIONS ll Introduction
ll Introduction ll Sequence
ll Constant ll Series
ll Parameter ll Arithmetic Progression (AP)
ll Types of Functions ll Harmonic Progression
ll Functions and its Graphs ll Mean Definitions
ll Functions ll Summary
ll Review Questions
UNIT 10: CASE STUDY: ANALYZING THE DEMAND
OF E-BOOKS
UNIT 8: EQUATIONS
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ll Introduction
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37
Unit 6
S
Notes
Determinants
___________________
___________________
___________________
Objectives
___________________
After completion of this unit, the students will be able to:
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___________________
\l Explain the concept of determinants
\l Solve linear equations using determinants ___________________
\l Explain what are high order determinants ___________________

\l Explain the main properties of determinants ___________________
\l Explain the applications of determinants in management
___________________
___________________
Introduction
In this unit, we will discuss the concepts of determinants and their
importance in solving real-world problems of business. While a ma-
trix is an array of numbers arranged into a certain number of rows
and columns, a determinant is a component of a square matrix, and
it cannot be found in any other matrix. Addition, subtraction, and
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multiplication of determinants can be conducted if the participating
matrices satisfy certain conditions.
Solving Linear Equation Using Determinants

Determinant can be defined as a square array of numbers or vari-
ables within vertical lines. A determinant and a matrix are two sep-
arate entities that completely differ from each other. A determinant
contains a numerical value, while a matrix does not have a numer-
ical value. Determinants possess two rows and two columns. The
basic representation of a pair of simultaneous equations consisting
of two unknown variables can be done in the following manner:
a1x + b1y = h1 (1)

(c
a2x + b2y = h2 (2)
The symbols, other than x and y represent known quantities. The

stepwise solution to solving these equations are: Firstly, conduct the
multiplication of the first equation throughout by a2 and that of the
second equation by a1.
38
a1 a2x + a2 b1y = a2h1 (3)
S
Notes
a1 a2x + a1 b2y = a1h2 (4)
___________________
___________________ Then, Eliminate x by subtracting the first equation from the second
equation:
___________________
a1b2y − a2 b1y = a1 h2− a2 h1
___________________
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___________________ a1h2 − a2h1
y= (5)
___________________ a1b2 − a2b1
___________________ After substituting the value of y in the first equation and rearrang-
___________________
ing the equation, we come to observe that:
___________________ X = (h1b2− h2b1)/ (a1b2− a2b1) (6)

___________________
These two formulae are called the general formulae to solve for un-
known variables of any pair of simultaneous linear equations.
The next crucial step is to introduce a way of representing this solu-

tion so that it is easy to remember. The method adopted, is to write:
)U
a1 b1
= a1b2 − a2b1
a2 b2
The equation displays the determinant on its left side with the
elements of the determinant denoted by the variables present in
between the vertical lines. The set of 4 elements shown this way
always represent a difference between the elements. This kind of
equation is notably termed as Identity,and its purpose holds true for
any values or symbols.
Properties of Determinants
This section will cover the properties of determinants and its ap-
plication in finding out the determinant of a matrix. We will fur-
ther study how these properties can provide information about
(c
matrices.
The basic properties of determinants is obvious. The value of the de-

terminant is unaffected when the first row transforms into the first
column and the second row becomes the second column. The value
of the determinant is multiplied by –1 in case the first and second
rows are interchanged.
Unit 6: Determinants
39
Further, Identities are certainly helpful in representing these two
S
properties: Notes
___________________
a1 b a1 a2
≡ ___________________
a2 b b1 b2
___________________
a1 b1 a a2
≡ −1 1 ___________________
a2 b2 b1 b2
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___________________
___________________
The justification of the identities holds true when both the sides are
multiplied according to the actual definition of a determinant. This ___________________
is termed as expanding the determinants. There is a third simple ___________________
property which can be similarly proved; the value of the determi-
___________________
nant remains unaltered when and if any multiple of a row or column
is added to the other row or column respectively. ___________________
a1 b1 (a1 + pa2 ) (b2 + pb2 ) (a1 + qb1 )b1

≡ ≡
a2 b2 a2 b2 (a2 + qb2 )b2
Whatever the values of p or q.

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So, determinants have properties which can be proved and utilized
in solving linear equations. The determinants that have two rows
and two columns are known as second-order determinants and are
effective in solving a pair of simultaneous equations having two un-
knowns. After a thorough understanding of the method of solution,
this method can be also used to solve higher order equations.
From the given pair of equations at the beginning of this section,

firstly take out the four coefficients written on the left side of the
equation and jot them down as a determinant. This further becomes
the denominator of the formula for x. When the coefficients of x are
replaced by the column values from the right side of the equation, it
becomes the numerator of the same determinant. So the formula is:
h1 b1
h2 b2
(c
X=
a1 b1
a2 b2
The Best Methods to Solve Linear Equations

There exist three different structured techniques that are effective
in solving a set of simultaneous linear equations:
40
● Determinants
S
Notes
● Row operations and
___________________
___________________ ● Matrices
___________________ The method of determinants is usually the quickest if one requires

___________________
the value of a few unknowns. This often applies when the equations
arise from problems in probability.
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___________________
In case ambiguity arises regarding the existence of unique solution
___________________
for a set of equations, the evaluation of the determinant of the coef-
___________________ ficients on the left-hand side of the equations should be carried out
___________________ first.
___________________ The method of row operations is the quickest way to obtain a com-
___________________ plete solution for all unknown variables. Row operation also pro-
vides the solution in the scenarios where determinant method pro-
vides the solution as zero divided by zero. It expresses the unknown
in terms of one another, there being no unique solution. Row opera-
tions are quicker than matrix methods since they obtain the whole
solution with no more work that is involved in inverting the matrix.
For a large number of different sets of equations, matrix methods

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prove to be very valuable, provided all have the same matrix coeffi-
cients.
All three methods can be applied using computer or algorithm-based

processor, but in practical scenarios, computer programs prefer ma-
trix methods because of wider applications of matrices.
Higher Order Determinants

The practical importance of determinants increases when it is nec-
essary to solve large numbers of equations with the corresponding-
ly large number of unknowns. It would be very convenient if the
solution of a large set of linear equations could be written out in
determinant form in the same way as described for a pair of equa-
tions. Considering the process to solve linear equations as discussed
above, the solution for the given equations can also be determined
(c
as follows:
a1x + b1y + c1z = h1 (1)
a2x + b2y + c2z = h2 (2)
a3x + b3y + c3z = h3 (3)

41
S
h1 b1 c1
Notes
h2 b2 c2
___________________
h3 b3 c3
X=
a1 b1 c1 ___________________
a2 b2 c2 ___________________
a3 b3 c3
___________________
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Until now, a determinant with three rows and three columns, termed ___________________
as Third Order determinant, has not been defined; there are, there- ___________________
fore, no rules for evaluating this. Since determinants hold the pur-
___________________
pose of determining the solution of a set of equations, the guidelines
___________________
for the evaluation of higher order determinants are hence designed
accordingly. ___________________
The value of x for the aforementioned determinant is ___________________
h1 (b2 c3 − b3 c2 ) − b1 (h2 c3 − h3 c2 ) + c1 (h2 b3 − h3 b2 )

a1 (b2 c3 − b3 c2 ) − b1 ( a2 c3 − a3 c2 ) + c1 ( a2 b3 − a3 b2 )
The terms here, have been arranged so that all the expression in
brackets can be expressed as second-order determinants. It can now
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be seen that this will be the same formula as given previously. So,
the rule that evaluates a third order determinant is:
a1 b1 c1 b2 c2 a2 c2 a2 b2
a2 b2 c2 ≡ a1 − b1 + c1
a3 b3 c3 b3 c3 a3 c3 a3 b3
The values of y and z are achieved by putting the information in the

form of determinants in the default equations in the exact same way
as it is done for a pair of equations. This means that the denominator
is same as mentioned in the formula for x and the column of values
from the right-hand side of the equation replaces the coefficients of
y and z in the determinants. This forms the respective numerators.
(c
a1 h1 c1 a1 b1 h1
a2 h2 c2 a2 b2 h2
a3 h3 c3 a3 b3 h3
y= z=
a1 b1 c1 a1 b1 c1
a2 b2 c2 a2 b2 c2
a3 b3 c3 a3 b3 c3
42
The same concept can be used to find out the solution for larger sets
S
Notes
of equations with the determinants structured in the same manner.
___________________ A determinant always consists of the same number of rows and col-
___________________ umns corresponding to the number of equations and the variables
that need to be solved.
___________________
___________________
The evaluation of a determinant consisting of “n” rows and columns
follow a specific rule; that is to multiply each of the “n” elements in
PE
___________________
the first row by the smaller determinant that was obtained by not
___________________ considering the first row and column which contains the elements
___________________ in question.
___________________ Hence, the multiplication of the first element and the default deter-
___________________
minant reduced by the first row and the first column is conducted.
The second element is also multiplied by the original determinant
___________________
which was reduced by the first row and the second column. This pro-
cess goes on. Finally, the products are collected together by adding
all the odd ones and subtracting all the even ones. So, a fourth order
determinant is expanded as:
a1 b1 c1 d1
b2 c2 d2 a2 c2 d2 a2 b2 d2 a2 b2 c2
a2 b2 c2 d2
= a1 b3 c3 d3 − b1 a3 c3 d3 + c1 a3 b3 d3 − d1 a3 b3 c3
)U
a3 b3 c3 d3
b4 c4 d4 a4 c4 d4 a4 b4 d4 a4 b4 c4
a4 b4 c4 d4
Third order determinants, which occur in this expansion, are termed

as minors of the original determinant. If the minor is prefaced by
the appropriate sign, it is termed as the co-factor of the element by
which it is multiplied. Thus, the co-factor of b1 is:
a2 c2 d2
− a3 c3 d3
a4 c4 d4
Now, we shall discuss the main properties of determinants.
Main Properties of Determinants

(c
The main properties of the determinants can be summarized as under:
1. The interchanging of the rows and columns does not affect the
value of the determinant.
2. If one row is interchanged with another row then the value of

the determinant is multiplied by –1 thus highlighting the first
43
two properties of determinants. In case of columns being inter-
S
Notes
changed, the value of the determinant is again multiplied by –1.
___________________
3. The value of the determinant remains unaltered when any
multiple of any row or column gets added (or subtracted) to ___________________
any other respective row or column. However, it is noted that ___________________

the addition of any row to a column is not possible and vice ___________________
versa.
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___________________
4. If any row or column contains a common factor to its elements,
___________________
then this factor can be taken out. For instance, by expanding
both the sides, it is observed that: ___________________
___________________
a1 b1 c1 a1 b1 c1
___________________
pa2 pb2 pc2 ≡ p a2 b2 c2
___________________
a3 b3 c3 a3 b3 c3
5. From (4) it is followed that any determinant having a row or

column of zeros will lead to the value of the determinant being
zero. It happens so because a row or column of zeros brings
forth the possibility of taking out all the zeros as common and
then multiplying it by the determinant.
)U
6. From (3) and (5) it is followed that the value of determinant if
termed to be zero when a row is identical to another row. This
holds true in case of columns as well; the value of the deter-
minant becomes zero when one column is identical to another
column or a multiple of any other column.
7. The value of the determinant is unaffected by the even number

of times the row makes an up-down movement. In case the row
is moved an odd number of times, the value of the determinant
is multiplied by –1. Similarly, the value of the determinant re-
mains unchanged if any column is moved an even number of
times but is multiplied by –1 in case the column moves an odd
number of times.
(c
8. If there exists a column that has all elements except one, as

zero, the determinant is the result of the only non-zero element
multiplied by its cofactor. The cofactor is obtained by deleting
the jth row and kth column (for any element present in the jth
row and kth column) to achieve the minor and then multiplying
by –1 in case the (j + k) is odd. In case (j + k) is even, it is left
as it is.
44
S
12 −28 9 1
Notes 12 −28 1
−10 −22 7 0
___________________ = −10 −22 0 (Positive sincee j = 3 and k = 3)
0 0 1 0
−1 5 15
___________________ 1 5 −2 15
___________________
12 −28 1
___________________ −5 −11
−5 −11 0 = (Positive since j = 1 and k = 3 )
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___________________ −181 425
−181 425 0
___________________
___________________ 2 7 0 5
2 7 5
−1 3 0 4
___________________
= −7 −1 3 4 (Negative since j = 4 and k = 3 )
4 2 0 −2
___________________ 4 2 −2
5 −4 7 1
___________________
All these properties of determinants can be proved, but the proofs

are of interest only to mathematicians. They are all intuitively rea-
sonable,and the manager who needs to use determinants should be
content to accept that they are valid for determinants of any order.
Applications in Management
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Managerial Problems Involving Determinants
The structured characteristics of determinants are effective in find-
ing the solution of simultaneous linear equations with the help of a
computer thus removing the drudgery from mathematics. It is still
necessary to understand the nature of determinants and their prin-
cipal properties to know what the computer is doing and why it may
sometimes fail to produce a solution. It is also an advantage to be
able to solve fairly simple sets of equations without the complica-
tions of computers, either by calculation on papers or by using a
calculator.
The problem displayed below is the obvious application of determi-

nants used for solving managerial problems. In this problem, it is
required to find the correct mixture of product that enables the full
(c
usage of machine capacity.
Example 1:
In an ONGC workshop, there are 7 machines for drilling, 2 for turn-
ing, 3 for milling and 1 for grinding. There are 4 types of brackets/
combinations made.
45
A – Type A is found by work-study to require 7 minutes for drill-
S
Notes
ing, 3 minutes turning, 2.5 minutes for milling and 1.5 minutes for
Grinding. ___________________
B – 5 minutes (D), 0 minutes (T), 1.5 minutes (M), 0.5 (G). ___________________
C – 14 (D), 6 (T), 9 (M), 3.5 (G). ___________________
___________________
D – 26 (D), 9 (T), 11 (M), 1.5 (G).
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___________________
How many brackets of each type should be developed per hour to
ensure that all the machines are fully occupied? ___________________
___________________
Solution:
___________________
The four equations could be set up in the same way as done earlier,
___________________
each equation representing the total minutes of work per hour on a
machine. The numbers on the right-hand sides would, therefore, be ___________________
420, 120, 180, and 60 respectively. The coefficients on the left-hand
sides would form the determinant constituting the denominator in
the solution.
This can be framed directly from the information provided in the

question and then evaluated:
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7 5 14 26
3 0 6 9 7 5 14 26 0 5 0 5
1 1 31 0 2 3 31 0 2 3
2 1 9 11 = =
2 2 45 3 18 22 4 0 3 8 7
1 1 1 1 3 1 7 3 0 1 1 −6
1 3 1
2 2 2 2
The operations have been as follows. From second row 3 and from
3rd and 4th-row ½ has been taken out as common. Then, 1 in the
second determinant the second row multiplied by 7, 5 and 3 respec-
tively is subtracted from 1st, 3rd, and 4th row respectively.
In the fifth determinant first column is subtracted from the third

column.
5 0 5 1 0 1
3 −15
(c
=− 3 8 7 = 3 8 7
4 4
8 1 −6 1 1 −6
1 0 0
−15
= 3 8 4
4
1 1 −7
46
−15 8 4 2 1
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Notes = = −15
4 1 −7 1 −7
___________________
___________________ –15(–14 –1) = 225
___________________ The numerator for type A appears more formidable at first, but can
___________________ be quickly simplified:
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___________________ 420 5 14 26 7 5 14 26 7 5 14 26
___________________ 120 0 6 9 2 0 6 9 2 0 6 9
= 60 = 50
___________________
180 3 9 11 3 3 9 11 6 3 18 22
60 1 3 1 1 1 3 1 2 1 7 3
___________________
___________________ −3 0 −21 11
−3 −21 11
___________________ 2 0 6 9
= 15 = 15 2 6 9
0 0 −3 13
0 −3 13
2 −1 7 3
−3 −7 16
= 45 2 2 35
0 −1 9
)U
−3 −7 16
−3 −80
= 45 2 2 35 = 45
2 35
0 −1 9
−3 −16
= 225
2 7
= 225(–21 + 32) = 225 × 11
Since the denominator is 225, the number of brackets per hour of

type A in the solution is 11. There are no new problems involved in
finding the solution for the other three types of the bracket which
can be solved by the students themselves.
(c
Most managerial applications of determinants are as straightfor-

ward as this example.
Determinants prove to be beneficial for determining the solution of a

number of equations but claim to create difficulty when you have to
look in the computerization of the firm’s operation. We then turn to
matrices to see how these can be used to solve managerial problems.
47
Brand Switching Example
S
Notes
Let us take up a managerial application of matrices, which is of the-
___________________
oretical as well as practical interest. This is commonly used by ad-
vertising agencies and big companies in brand management. ___________________
___________________
Example 2:
___________________
3 brands of oil, share the market as mentioned below:
PE
___________________
40% customers prefer Brand A
___________________
50% customers prefer Brand B ___________________
10% customers prefer Brand C. ___________________
Each week there are changes in customer’s choices, below is the ___________________
market switch related information: ___________________
● Of those who bought Brand A in last week, 50 buy it again,

15% shift to B and 35% shift to C
● Of those who bought Brand B in last week, 60 buy it again,

10% shift to A and 30% shift to C
● Of those who bought Brand C in last week, 85 buy it again,

)U
5% shift to A and 10% shift to B.
What ratio of the total market share will each of the three brands
hold eventually? Which brand will lead the market share within 2
weeks?
Solution:
It is simplest to express the brand switching percentage as decimals,
keeping percentage figures for the market shares. The change in
market shares in the first week can be obtained as the product of a
matrix representing the brand switching and a vector representing
the initial market shares:
⎡0.50 0.10 0.05 ⎤ ⎡40 ⎤ ⎡25.5⎤

⎢0.15 0.60 0.10 ⎥ ⎢50 ⎥ = ⎢37.0 ⎥
⎢ ⎥⎢ ⎥ ⎢ ⎥
(c
⎢⎣0.35 0.30 0.85 ⎥⎦ ⎢⎣10 ⎥⎦ ⎢⎣37.5 ⎥⎦
It will easily be seen that the terms involved in this product, (0.50×
40), (0.10 × 50), etc., are the correct calculations from the informa-
tion given in the example to obtain the new market shares. In this
type of model, each of the matrices adds up to 1 and the elements in
each vector totals 100.
48
For the following week, the new market-share vector must multiply
S
Notes
the same brand switching matrix:
___________________
⎡0.50 0.10 0.05 ⎤ ⎡25.5⎤ ⎡18.325 ⎤
___________________ ⎢0.15 0.60 0.10 ⎥ ⎢37.0 ⎥ = ⎢29.775⎥
⎢ ⎥⎢ ⎥ ⎢ ⎥
___________________ ⎢⎣0.35 0.30 0.85 ⎥⎦ ⎢⎣37.5 ⎥⎦ ⎢⎣51.900 ⎥⎦
___________________
As could have been guessed from the original information, Brand C
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___________________
is getting a steadily larger share of the market. It cannot, however,
___________________
obtain a monopoly. A little arithmetic will show that if Brand C
___________________ has 80 of the market in the first week, it cannot have more than
___________________ 75% the next. Clearly its eventual share will be somewhere between
51. and 75 , but obviously, a direct method of finding the even-
___________________
tual share is difficult to calculate using matrix method.
___________________
As a practical application, the brand switching example has two
drawbacks. First, repeated matrix multiplications will eventu-
ally involve fractions of customers, which is impossible. Second,
it is highly improbable that there will be a persistent pattern of
brand switching; either customer will become less inclined to switch
brands,or the pattern of switching will be disrupted by special sales
)U
campaigns or dynamic market forces.
However, the model has many other applications more realistic than
brand switching, particularly when the discussion is transferred
from proportions to probabilities. Hence, we can see that matrix
and determinant play the role of important quantitative techniques
which can be used by decision manager to solve a real-life manage-
ment problem.
Summary
The determinant is notably a useful value which can be easily de-
rived from the elements of a square matrix. It can be stated as a
scaling factor associated with the change defined by the matrix.
The application of determinant is spread through mathematics. For

(c
instance, a matrix positively contributes towards the representation

of coefficients in a system of linear equations. It is also beneficial
for determining the solution of linear equations. The characteristic
polynomial of a matrix is defined by determinants.
Determinants are primarily used as a theoretical tool. They are

rarely calculated in numerical linear algebra. However, an explicit
49
calculation of determinants is needed in certain situations, and a
S
Notes
number of methods exist to do so. The naive method to implement
an algorithm to determine the determinant includes the use of the ___________________
Laplace’s formula. ___________________
___________________
Review Questions
___________________
1. Solve for the number of brackets required per hour for types B,
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___________________
C and D in example 1 provided earlier.
___________________
2. How do determinants differ from matrices?
___________________
3. What is the value of a 3 × 3 determinant in which all the diago-
___________________
nal elements are 1,and all the remaining elements are 0?
___________________
4. Using the determinant method, determine the values of X and
___________________
Y.
3x + 2y = 5
5x + 6y = 19
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(c
(c
)U
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S
51
Unit 7
S
Notes
Functions
___________________
___________________
___________________
Objectives:
___________________
After completion of this unit, you will be able to:
PE
___________________
\l Explain functions.
\l Differentiate the type of functions. ___________________
\l Elaborate on functions and its graphs. ___________________
___________________
Introduction ___________________
A variable y is stated to be a function of variable x under a specific ___________________

rule. For instance- the area of a circle is a function of radius.
It is represented as y = f(x)
For example – the relation between area and radius of a circle is

shown as
)U
A = f(r) or A = nr2
Constant
Constant values remain unchanged in a problem.
A constant function of a single variable, let’s say for instance f(x) =

5 has a graph with a horizontal straight line which is parallel to the
x-axis. Such type of a function will always consider the same value.
In our example, it will take 5 since its argument is not in the expres-
sion that defines the function.
Parameter
The parameter is a value that remains constant irrespective of the
problem or context. A function definition contains parameters, but
(c
unlike variables, parameters are not comprised of the arguments in

the function. When parameters are set, the definition takes into con-
sideration the entire family of functions, one for every rational set of
the value of the parameters.
52
Types of Functions
S
Notes
___________________ Linear Function
___________________ A linear function can be defined as any function that can be graphed
to a straight line. The mathematical explanation of this definition
___________________
is, a linear function has one or two variables without exponents and
___________________ powers. When the function has more variable, the variables must be
PE
___________________ constants for the function to be considered a linear function.
___________________ A function of the form y = a + bx is a linear function

___________________ Where y is stated as the dependent variable
___________________ X is known as the independent variable
___________________ a and b are constants
___________________
This linear function represents the equation graphically in the form
of a straight line whose slope is equal to b, and y-intercept of a. For
example: Y = 34 + 12x
In this, Y is the dependent variable
34 and 12 are constants

)U
Y = 34 + 12 X
X-axis
(0, 34)
(-17/6, 0) X-axis
Figure 7.1: Graph for Linear Functions
Absolute Value Function

(c
A function that contains an algebraic expression provided within

absolute value symbols is termed as an Absolute Value function.
The absolute value of a number is the distance of the number from
0 on the number line.
If y is equal to the absolute value of X, then it is an absolute function
y= x
Unit 7: Functions
53
For example:
S
Notes
X 20 −35 − 12 40 − 21 25
___________________
y 20 35 12 40 21 25
Y-Axis ___________________
___________________
___________________
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___________________
___________________
___________________
y = |x|
___________________
___________________
X-Axis ___________________
Figure 7.2: Graph for Absolute Functions
Step Function
A function defined on real numbers that are expressed as a finite
linear combination of indicator functions of intervals is defined as
a Step function. A step function may increase or decrease suddenly
)U
from one constant value to another. The value of y remains same for
a range of values from x
For example:
Y = 10 for x = 0 – 10
Y = 5 for x = 11 – 20
Y = 0 for x = 21 – 30
Y-Axis
(c
X-Axis
Figure 7.3: Graph for Step Functions
54
Quadratic Function
S
Notes
A Quadratic function is a form, where a, b, and c are numbers; where
___________________
a is not equal to zero. The graph formed from a quadratic function
___________________ is always a parabolic curve. A parabolic curve is either open upward
___________________ or downwards and varies in its width or steepness.
___________________ A function of the following form is called a quadratic function if the
PE
___________________ maximum power of x is 2
___________________ y = ax2 + bx + c
___________________ Where, a, b and c are numbers where ‘a’ is unequal to ero.
___________________
For example:
___________________
y = 3x2 + 20x + 340
___________________
Polynomial Function
A function which is defined by the assessment of a polynomial is
termed as a Polynomial function So, a function f of an argument is
a polynomial function if it satisfies. The function f(x) = 0 is a polyno-
mial, with an undefined degree. A polynomial function involves only
non-negative integer powers of x. A function of the following form is
)U
called a polynomial function if the power of x is n
y = axn + bx(n–1) + cx(n–2)…………..
Where, a, b, c etc are numbers where, ‘a’ is not equal to zero.
For example
y = 3x4 + 4x3 + 12x2 + 6x + 35
Functions are the way of representing a dependent variable on one

or more independent variables. This is very well applicable in many
real-life scenarios as well. For example:
Productivity of a team can be dependent on multiple factors like:
● Level of motivation
(c
● Number of working hours
● Absenteeism in the team
● Subject matter expertise/process knowledge, etc.
Hence, productivity will be a dependent variable which will be a

function of multiple aforementioned factors. The level of dependency
Unit 7: Functions
55
that productivity maintains with each of the factors will certainly
S
differ. Notes
___________________
Functions and its Graphs ___________________
In everyday life, it is a very common case that the value of one quan- ___________________
tity is dependent on the value of another quantity. For example, the ___________________
salary of a person working in a fast food store will depend on his
PE
___________________
number of working hours.
___________________
In the following section, We will be focusing on functions and their
___________________
graphs.
___________________
Functions ___________________
A function is a rule that explains the dependency of the value of one ___________________
quantity on the value of the other quantity.
Example:
A bicycle has been newly introduced in the market. It can cover a
distance of 20 seconds. The speed of the bicycle can be given by:
)U
d
s= = 0.05 d
20
Here,
s is speed
d is the distance
When the distance that can be covered by the bicycle is 10 m, then

the speed will be
s = 0.05 × 10
=0.5m/s
This indicates that when d increases, the speed increases.
When d decreases, the speed decreases.

(c
The Graph of a Function

The set of points whose co-ordinates (x, y) satisfy the function
y = f(x) is referred to as the graph of a function. This states that for
each x–value there is a corresponding y–value that can be obtained
by substituting it in the expression for f(x).
56
Example:
S
Notes
A new bowler in the Australian team has a height of 2m. When he
___________________
throws a ball straight upward,and the height to which the ball goes
___________________ up is given as h = 2 + 9t – 4.9t2m. Graph the function for the given
___________________ scenario.
___________________ Solution:
PE
___________________ In the given scenario, we will start at t = 0, as the negative values of
___________________ the time do not have any value.
___________________ Let us consider the values 0.5 apart.
___________________
t 0 0.5 1 1.5 2
___________________ h 2 5.3 6.1 4.5 0.4
___________________ The graph for the given scenario can be plotted as follows:
4
)U
3
2
1 t
-1 0.5 1 1.5 2
Summary
The graph of a function f in mathematics is known as an assembly of
all ordered pairs. There exists a conception that highlights the gen-
eralized connection of the graph of a function to the graph of rela-
tion. It is necessary to be aware of the fact that although a function
is always recognized with its graphical representation, they might
not be the same. This comes in regard to two functions having dif-
ferent co-domains but having the same graph.
Moreover, the graph of the function benefits us in various means.

(c
Real world problems can be best modeled using the graph of a func-
tion. This includes the process of determining the relationship that
various quantities share. The graph provides us with the meaning-
ful notion regarding the function that needs to be applied to solve a
situation, especially when we are not aware of an expression for a
function.
Unit 7: Functions
57
Review Questions
S
Notes
1. Take one management example each from Finance, Market- ___________________
ing,and Operation domains, which explain the relationships
___________________
between dependent and independent variables in the form of a
function. ___________________
___________________
2. Create the line graph of the linear equation
PE
___________________
= − 4 − 1.2x
___________________
3. Create a graph of y = 3 x
___________________
___________________
___________________
___________________
)U
(c
(c
)U
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S
59
Unit 8
S
Notes
Equations
___________________
___________________
___________________
Objectives: ___________________
After completion of this unit, you will be able to describe the following:
PE
___________________
\l Linear Equations and Roots
___________________
\l Quadratic Equations and Roots
___________________
Introduction ___________________
___________________
Equation expresses the mathematical relationship between two
variables. The independent variable can assume any value within ___________________
its specified range. The value of the dependent variable depends on
the value assumed by the independent variable.
The type of equations depends on the degree of the equations. Linear

equations will have the variables in 1 degree, or we can say that the
power of the variables will be 1 whereas, in quadratic equations, the
)U
degree is 2.
In this chapter, you will study about linear equations and quadratic
equations and along with solving such types of equations.
Linear Equations
A linear equation is best defined as an algebraic expression which
contains a constant for every term or a product of a constant and a
single variable. A simple linear equation having one variable can be
denoted in the form of ax + b = 0, where a and b are constants and a
is unequal to 0.
A linear equation is one in which maximum power of independent

variable is one and assumes following relation.
y = a + bx
(c
Where,
y is dependent variable and x is the independent variable.
a and b are numbered,and a should not be equal to zero

60
Roots of Linear Equations
S
Notes
___________________ Roots of equation refer to the values of an independent variable that

makes the value of a dependent variable as zero.
___________________
___________________ Roots of linear equation

___________________ y = a + bx
PE
___________________ a + bx = 0
___________________
x = (–a)/b
___________________
___________________ Quadratic Equation

___________________ A Quadratic Equation can be defined as an equation having the form
___________________ ax2 + bx + c = 0. Here, x is unknown, and a, b, and c are known num-
bers, such that a ≠ 0. A quadratic equation involves one unknown
value, so it is termed as univariate. Such types of equations contain
powers of that are non-negative integers. A quadratic equation is
one in which maximum power of independent variable is two and
assumes following relation.
y = ax2 + bx + c
)U
Where,
a, b and c are numbers and ‘a’ should not be equal to zero.
Roots of Quadratic Equation

In this section, we will accentuate on how to determine the roots of a
quadratic equation. Roots are often termed as x-intercepts or zeros.
A quadratic function can be graphed by a parabola, with its vertex
located at the origin point, that is below the horizontal axis or above
the horizontal axis. So, a quadratic function may contain 1, 2or zero
roots.
y = ax2 + bx + c
ax2 + bx + c = 0
(c
x = ((-b (b2 – 4ac))/2a
Summary
In this module, we have studied equations. We have encountered
equations with one variable that have a finite number of solutions.
Unit 8: Equations
61
We have also come across equations with two variables which are
S
Notes
satisfied by an infinite number of ordered pairs. The system of equa-
tions is also an important part of equations that we have dealt with. ___________________
The system of equations reappears frequently in the studies of ___________________
Mathematics, Science, Engineering, and other technical fields. They ___________________

are useful in maximization and minimization problems, wherein
___________________
solving the problems by graphing becomes significantly helpful. The
PE
___________________
systems of equations also play a significant role in chemistry and
physics; in fact, they are applicable in any situation that deals with ___________________
multiple variables and multiple constraints on them. ___________________
Review Questions ___________________
___________________
1. Determine the roots of the quadratic equation:
___________________
y = x2 + 17x + 52
2. Find the roots of the quadratic equation:
y = 4x2 + 5x + 47
3. What are the roots of the following equation?

)U
y = x2 – x – 56
4. Determine the roots of the equation:
y = x2 – 1
(c
62
S
Notes
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
___________________
)U
(c
63
Unit 9
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Notes
Progression
___________________
___________________
___________________
Objectives:
___________________
PE
___________________
\l Sequence and Series
\l Arithmetic Progression and Arithmetic Mean ___________________
\l Geometric Progression and Geometric mean ___________________

\l Harmonic Progression and Harmonic Mean
___________________
___________________
Introduction
___________________
A progression may be defined as a collection of numbers that may
increase or decrease or follow a certain pattern. This can help us see
a trend, of a specific market over a particular time period.
Sequence and series are a form of progressions
Sequence
)U
If for every positive integer n, there corresponds a number an such
that an is related to n by some rule, then the terms a1,a2, ... an... are
said to form a sequence.
A sequence is denoted by bracketing its nth term, that is(an) or {an}.

Examples of a few sequences are:
If an = n2, then sequence {an} is 1, 4, 9, 16, .......,n2, …..
If an = 1/n, then sequence {an} is 1, 1/2, 1/3, 1/4…….1/n …..
If an = n2/(n + 1) , then sequence {an} is 1/2,4/3,9/4,….... n2/n +

1, ...
The concept of the sequence is very useful in finance. Some of the

major areas where it plays a vital role are:
(c
● Installment buying,
● Simple and compound interest problems,
● Annuities and their present values,
● Mortgage payments and so on.

64
Series
S
Notes
___________________ A series is formed by connecting the terms of sequences with plus or

minus sign. Thus, if an is the nth term of a sequence, then
___________________
___________________ a1 + a2 + ………….. + an
___________________
Arithmetic Progression (AP)
PE
___________________
___________________ A progression is a sequence whose successive terms indicate the

growth or progress of some characteristics. An arithmetic progres-
___________________
sion (AP) i a sequence whose term increases or decreases by a con-
___________________ stant number called a common difference of an AP and is denoted
___________________ by d. In other words, each term of the AP after the first is calculated
by adding a constant d to the preceding term. The standard form of
___________________
an AP is written as:
a, a + d, a + 2d, a + 3d,.......
where ‘a’ is known as the first term. Thus, the corresponding stan-
dard sum of an arithmetic series becomes:
a + (a + d) + (a + 2d) + (a + 3d) +......

)U
Example:9.1
Suppose we invest Rs. 100 at a simple interest of 15% per annum for
5 years. The amount at the end of each year is given by:
115, 130, 145, 160, 175
The above series of numbers form an arithmetic progression.
The nth term of an AP
The nth term of an AP is also known as the general term of the stan-
dard AP. It is given by:
Tn= a + (n − 1)d; where n = 1, 2, 3,……………
Sum of the First n terms of an AP

(c
Consider the first n terms of an AP
a, a + d, a + 2d, a + 3d,..., a + (n − 1)d
The sum, Sn of these terms is given
Sn = a + (a + d) + (a + 2d) + (a + 3d) + ......+ a +(n − 1)d

Unit 9: Progression
65
= (a + a + a +…+ a) + d{1+2+3+…..+(n − 1)
S
Notes
= n.a + d {(n(n - 1))/2 (using formula for the sum of first (n −
___________________
1) 2 natural numbers)
___________________
S = (n/2)(2a+(n-1)d)
___________________
Geometric Progression (GP) ___________________
PE
___________________
Geometric progression is defined as a sequence that calculates the
successive numbers of the series by conducting the multiplication of ___________________
the previous number by a fixed, non-zero number known as common ___________________
ratio. Geometric progression is also known as Geometric series.
___________________
In general, we can represent the GP as: ___________________
{a, ar, ar2, ar3,…, ar(n-1)) ___________________
Where ‘a’ is the first term in the series
And r is the common ratio
Here, the general formula for tenth term of the series becomes:
an = ar(n-1)
)U
To calculate sum of the GP:
S = a + ar + ar2 +…+ ar(n − 1)
Thus, S = a(1 + r + r2…+r(n − 1))

n −1
⎛1 − rn ⎞
∑( )
k=0
ark = a ⎜
⎝1−r⎠
⎟
a is the first term

r is the “common ratio” between terms
n is the number of terms
Using the above-mentioned formula to calculate the sum,
If a =10, r = 3
(c
Calculating the sum of first 4 numbers in the GP
S = 10 + 30 + 90 + 270 = 400
Validating this with the formula
S = 10 ((1 − 34)/(1 − 3))

66
= 10 (80/2)
S
Notes
= 400
___________________
___________________ The above-mentioned formula works well for calculation sum of a

finite series. If we want to extend this concept to calculate the sum
___________________
of infinite series of numbers, we need to have few rules.
___________________
The sum will be a finite number only if r 1
PE
___________________
When − 1 r 1, asn becomes arbitrarily large, rn tends to zero.
___________________
Hence, taking the limit of the sequence, we get:
___________________
___________________
S∞ = lim Sn = lim
(
a 1 − rn )= a
___________________
n→∞ n→∞ 1−r 1−r
___________________ Example: 9.2

If a ball is released from a height of 100 meters, and it rebounds to
a height of two-thirds from the height it has fallen., find the total
amount of distance covered by the ball before stopping.
Solution:
)U
Once the ball is dropped, it covers the 100m distance in the first
release before hitting the ground. After this, it covers the rebound
distance twice every time it bounces (once while going up and once
while coming down)
So effectively, the total distance will be:
S = 100 + 2(a/(1 − r)) where “a” will be initial bounce distance which
will be (100/3) and r is 2/3 as per data
So,
S = 100+ 2 ((100/3)/(1−(2/3))
Thus,S = 100 + 2(100) = 500 meters
Harmonic Progression
(c
A sequence consisting of real numbers which are developed by con-

sidering the reciprocals of the numbers of an arithmetic progression
is known as Harmonic Progression.
Example – 1, 3, 5, 7, … form an AP. Hence, 1, 1/3, 1/5, 1/7 …. will

form an HP
Unit 9: Progression
67
A sequence is considered as a harmonic progression if it contains the
S
Notes
non-zero reciprocals of arithmetic progression as its terms.
___________________
A harmonic progression has a maximum possible length and can be
calculated as follows: ___________________
___________________
Max. length of a harmonic progression = m + n – 1
___________________
Here,
PE
___________________
m is the m term of harmonic progression
th
___________________
n is the nthterm of harmonic progression ___________________
___________________
ean efinitions
___________________
Mean
___________________
Mean is one of the easiest and most understood measures of central
tendencies. There are basically three types of mean. They are:
● Arithmetic mean
● Geometric mean
● Harmonic mean
)U
Arithmetic Mean
Arithmetic mean is the sum of a collection of numbers divided by
numbers in a collection.
It can be determined by taking the sum of all the observations in the

data set and dividing it further by the total number of observations
or items. Suppose a set of data consist of number of data with values
x1 + x2 + x3 + ... + xn, then its sample mean will be,
x1 + x 2 + x3 + .... + x n
x=
n
The mean is generally denoted by x.
Thus, if the percentage of the students in an exam is 82%, 93%, 71%,

(c
86%, 65%, 91%, 79%, 83%, 88%, and 77%, then the average percent-
age of the class will be as follows,
⎛ 82+ 93+ 71 + 86 + 65+ 91 + 79 + 83+ 88 + 77 ⎞

x =⎜
⎝ 10 ⎟⎠ %
68
⎛ 815⎞
S
x =⎜ %
⎝ 10 ⎟⎠
Notes
___________________
___________________ x = 815
. %
___________________ Therefore, the average percentage of the class is 81.5%

___________________
a1 + .... + ak
fAM =
PE
___________________ k
___________________
Geometric Mean
___________________
The geometric mean is defined as the sequence of numbers that host a
___________________
common ratio between any two adjacent terms. This common ratio is
___________________ denoted by ‘r’. The formula for determining geometric progression is:
___________________ fGM = k a1 ! ak .
Example of a geometric progression is 1, 3, 9, 27, ... made up of an

infinite number of terms and a common ratio of 3.
Harmonic Mean
The harmonic mean is the progression which contains the recipro-
)U
cals of an arithmetic progression. The reciprocals of the elements
are in arithmetic progression in this sequence of numbers. The for-
mula for the harmonic mean is given below:
k
fHM =
1 1
+!+
a1 ak
1 1 1
Example of harmonic progression is , , ,! , where if the re-
3 6 9
ciprocal of each term is taken into consideration, the sequence will
come out to be 3, 6, 9, …
Now, we will focus on understanding the relationship between the

three types of mean.
(c
Relationships between different types of mean
Arithmetic means (AM), geometric mean (GM), and harmonic

mean(HM)are interrelated to each other. When AM, GM, and HM
are described as arithmetic, geometric and harmonic means be-
tween a and b, then
Unit 9: Progression
69
a+b
S
AM = Notes
2 (i)
___________________
GM = ab (ii) ___________________
2ab
HM = ___________________
a+b (iii)
___________________
Therefore, the relationship between the arithmetic means, geomet-
PE
___________________
ric mean and harmonic mean can be represented as follows:
___________________
fAM fGM fHM
___________________
It is visibly apparent that the relationship between the arithmetic
___________________
mean, geometric mean and harmonic mean follows a descending or-
der of magnitude. ___________________
___________________
Summary
A sequence of numbers that offers a constant value when the consec-
utive terms are subtracted from each other is called an arithmetic
progression.
Arithmetic progression can be applied in real life by analyzing a

)U
certain pattern that we observe in our daily life. An arithmetic pro-
gression is applicable in almost all aspects of our lives. To have ade-
quate knowledge about this kind of sequence can give us a different
perspective on how things happen in our lives.
Review Questions
1. In an arithmetic progression, if the 35th term is 15 and the com-
mon difference is 2, what is the 32nd term?
2. Consider an AP with a first and common difference as 100. If

thenth term is 100! (where“!” denotes factorial), determine n.
3. Find the sum to infinity if the first 3 terms of the GP are as

mentioned below:
2 + 1,1. 2 − 1
(c
4. If 21 is the 10th term of an HP and 10 is the 21st term of the same

HP. Find the 210th term.
5. If a, b, c forms an AP; b, c, d forms a GP and c, d and e forms an

HP; what is the relationship between a, c and e?
(c
)U
PE
S
71
Unit 10
S
Notes
Case Study: Analyzing The

___________________
___________________
Demand of E-Books ___________________
___________________
An electronic book or (e-book) is a book publication made avail-
PE
able in digital form, consisting of text, images, or both; readable on ___________________
the flat-panel display of computers or other electronic devices. It’s
___________________
an electronic version of a traditional print book that can be read by
using a personal computer or by using an eBook reader. ___________________
These e-books can either be downloaded onto your smartphones via ___________________
apps or can be purchased from thousands of retailers like Amazon. ___________________
In fact, you can also buy eBooks directly from an author’s website.
With e-books searching for your favorite read is easier than before, ___________________
as users can simply browse through titles online, and place the or-
der to be shipped or downloaded.
The significant reasons for the rise in demand for e-books are the
saving money, mobility, saving space, convenience, saving time,
and ease-of-use.
E-Books don’t just include fiction or non-fiction books,butit includes

)U
books with technical material too.
A data Analytics Firm Metrics Ltd. wants to study the consum-

er buying behavior and the demand for the e-books. The firm also
wants to understand the relationship between the demands for
e-books based on price over hard-bound books. The company ap-
points a business analyst Mr. Sudeep to use his knowledge of func-
tions and equations to realize the aims of the study. As per the data
available with the analytics firm, he compiles the below informa-
tion:
Monthly demand for a society’s downloadable e-books is explained

by the equation:
Q = 2 – 0.4Pe + 0.0005I + 0.15Ph
Where, Q = Demand of the E-books

(c
Pe = Price of the E-books per Unit
I = Monthly Income of the Person
Ph = Price of the hard-bound books per Unit
Assuming the average price of afictional e-book is Rs. 630 and

average monthly income of the society are Rs. 60,000 and price of
Contd.
72
S
hard-bound book Rs. 1,500, Mr. Sudeep, wants to plot the demand
Notes
function on the graph and determine the number of e-books de-
___________________ manded by the society each month. Also, he wants to find out a
how much the society is willing to pay by calculating an inverse de-
___________________
mand function using the values of average monthly income of the
___________________ society and price of hard-bound books and what is the relationship
between the prices of e-books and prices of hard-bound books.
___________________
PE
___________________
Solution:
___________________ (a) The inverse demand function expresses Px constituted

by the function of x or in another word, it is ‘quantity’
___________________
being a function of the prize, as in this case).
___________________
Simply solve the solution:
___________________
Q = 2 – 0.4 Pe + 0.00051 + 0.51 Ph
___________________
Here, Pe is the price of e-books, Ph is the price of hard-bound books
and I is the monthly income of the person.
Q = 2 – 0.4 Pe + 0.00051 + 0.51 Ph
Substitute 60,000 for I
Q = 2 – 0.4 Pe + 0.0005 + 60000 + 0.15 Ph

)U
Q = 32 + 0.15 Pe – 0.4 Pe
Since, we have to calculate the value of Pe, substitute 1500 for Pb
Q = 257 – 0.4 Pe
Q + 0.4 Pe = 257
Substitute 0 for Pe
Q = 257
Now, Substitute 0 for Q
Pe = 642
The customer is willing to pay Pe = 642 for an e-book.

(c
Now, plot the supply function
Q = 32 + 0.15 Ph– 0.14 Pe
Substitute the value Pc as 630 (given)
Q = 32 + 0.15 Ph – 0.4 Pe
Q = 284 + 0.15 Ph
Contd.
Unit 10: Case Study: Analyzing The Demand of E-Books
73
S
Ph = 6.6 Q – 1893.33
Notes
price ___________________
___________________
900
___________________
750 642
___________________
PE
___________________
600
___________________
450
___________________
___________________
300
___________________
150 257
___________________
quantity
40 80 120 160 200 240 240 320
Solve both the equations
Ph = 6.6 Q –1893.33
)U
Q + 0.4 Pe = 247
The answers are
P = – 54.15 and Q = 278.633
The relation between prices for both books is:
And,
Q = 0.4 Pe = 257
So that makes,
284 + 0.15 Pe = 257 – 0.4 Pe
Outcome/Result:
(c
(c
)U
PE
S
S
PE
BLOCK–III
)U
(c
Detailed Contents
S
UNIT 11: FORECASTING UNIT 13: STATISTICS
ll Introduction ll Statistical Data
ll Dependent and Independent Demand ll Data
ll Steps in Demand Forecasting ll Summary
ll Components of Demand ll Review Questions
PE
ll Techniques of Forecasting
UNIT 14: GRAPHICAL REPRESENTATION
ll Forecasting Error OF DATA
ll Sources of Forecast Errors ll Bar Graph
ll Monitoring Forecast Errors ll Pie Charts
ll Summary ll Line Graph
ll Review Questions ll Summary
ll Review Questions
UNIT 12: INTRODUCTION TO STATISTICS
ll Introduction UNIT 15: CASE STUDY: ANALYSIS OF
SEASONALITY IN SALES
ll Primary and Secondary Data
ll Summary
ll Review Questions
)U
(c
79
Unit 11
S
Notes
Forecasting
___________________
___________________
___________________
Objectives:
___________________
PE
___________________
\l Concept of forecasting
\l Dependent and independent demand ___________________
\l Steps in demand forecasting ___________________

\l Components of demand
___________________
\l Techniques of forecasting
___________________
\l Forecasting and linear trend function
\l Forecasting errors ___________________
\l Monitoring forecast errors
Introduction
Forecasting is determining the direction of future trends based on
historical data. It involves the estimation of some variable at a fu-
)U
ture date. Forecasting is a planning tool that helps the management
to attain with the uncertainty of the future. Forecasting initiates
with assumptions, such as experience, knowledge, and judgment.
Forecasting involves the use of past data to find out the direction of
future trends.
A few real-life examples of forecasting will help understand the con-

cept of forecasting more clearly.
Consider few examples of forecasting in project management of var-

ious sectors. Demand for tellers in a bank, demand for automobiles
or consumer durables, are a demand for refrigerated food items in
a particular region, and the pre-poll opinion survey among voyeurs.
However, the demand may also depend upon certain other factors
and based on that demand is categorizes as dependent demand and
(c
independent demand.
Dependent and Independent Demand

Dependent demand and Independent demand are two major types
of demand. If demand for a product depends on some other vari-
ables, like the demand of razors, depends upon the demand of
80
blades. This is called dependent demand. When the demand is
S
Notes constant in nature and has a null dependency on any variable
___________________ like season, subparts, etc. it is termed as independent demand.
___________________
Steps in Demand Forecasting
___________________
The steps involved in forecasting are as under:
___________________
PE
___________________ Specifying the Objective: The objective for the demand forecast-
___________________
ing must be clearly stated. The parameters, such as complete or
seasonal, long term or short term, etc. should be described clearly.
___________________
With the addition to this, the targeted market should also be spec-
___________________ ified. The objective should be stated clearly before the forecast is
___________________ demanded, this gives a sense of direction to the forecast.
___________________ Determining the Time Perspective: The forecast for demand

could either be for a short-term or a long-term ranging from 1 to
3 years. Although the determinants stay constant in a short-term
forecast, the same does not stand true for long-term forecasts. With
time, the determinants of long term forecasts and forecasts them-
selves can also alter. Therefore, it is essential to keep time in mind.
)U
Making a Choice of Method for Demand Forecasting: It is time
to choose the forecast method after time and method for forecasting
have been completed. A survey can be conducted in two forms – sur-
vey methods and statistical methods
Collection of Data and Data Adjustment: Primary and second-

ary data is to be procured post decision regarding the method. When
the data is derived directly by the statistician for a particular study
only when the data is called a ‘Primary Data’ and when the data is
derived from other sources like published sources then it is termed
as ‘Secondary Data.’
Estimation and Interpretation of Results: Calculation of

demand for number of years as decided for the survey, is to be
done, after collection of the data. The estimate of the demand is
always obtained in the form of equations. These equations can
(c
be simplified further and interpreted in various ways.
Components of Demand
Demand comprises of five major components. These are as follows:
● Average: The average of all past demands

Unit 11: Forecasting
81
● Trend: A continuous increase or decrease in demand over time
S
Notes
● easonal in uence: An increase or decrease in demand during ___________________
different identifiable phases of time
___________________
● Cyclical movements: Change in demand pattern over a long ___________________
span of time
___________________
PE
Random Movements: Random variations in demand usually occur ___________________
because of unpredictable reasons or a random phenomenon such as
___________________
a natural calamity.
___________________
Techniques of Forecasting ___________________
The techniques of forecasting can be broadly divided into three cat- ___________________
egories: ___________________
● Based on judgment
● Based on time series
● Associative forecast
)U
Judgment Based Forecasting
This technique makes use of forecasts based on the judgment of
the surveyor. The qualitative and subjective data for the forecast is
based on sound judgements and can later be interpreted as results.
This technique is primarily used in the scenarios where quantitative
data/historical data is missing. Some of the key procedures that are
used in this are:
(a) Simple Survey Methods
(i) Consumer Survey–Complete Enumeration Method
(ii) In this, the investigator collects and analyzes the data

collected from all the consumers. This method is prone to
errors. If the data recorded is incorrect for some reason,
(c
the results will vary vastly. Consumer Survey–Sample

Survey Method.
In this, the forecaster collates the details only for a se-

lected sample of consumers. The collated data is then
blown up to project the demand for the complete popula-
tion. Consumer survey is a less troublesome task,and the
82
method does not have much room for errors. The samples
S
Notes will be from various aspects of the population and will
___________________ come from all variants in the population. If chosen prop-
___________________ erly, there will be no room for errors. If the sample size
increases, the chances of errors during sampling decreas-
___________________
es. End User Method of Consumers Survey
___________________
Under this method, the sales of a product are projected
PE
___________________
through a survey of its end users.
___________________
___________________ (b) Consensus Methods
___________________ (i) The process of forecasting based on judgments further in-

___________________ volves the use of consensus methods. Under the consen-
sus method, a group of people is usually asked questions
___________________
to know about their views and opinions to make a gener-
al forecast. The different techniques of forecasting under
consensus methods include:
Experts Opinion Poll
In this, a small set of experts are asked about their view/

)U
opinion/feel to forecast the sales/demand for the product.
(ii) Reasoned Opinion–Delphi Technique: In this type of

survey method, a result is obtained by using the method
of consensus. The group of respondents is supplied with
answers from experts in the field. The surveyor asks dif-
ferent questions and supplies the respondents with the
answers the surveyor received from the expert. The re-
spondents are given time to reframe their options. The
result obtained from this type of survey for demand or
sales is fuelled by “reasoned opinion” than “unstructured
opinion.”
Time Series Based Forecasting

(c
Project patters which have been recognized with current obser-

vations of time series are involved while making such time series
based forecasts. A time series is described as sequence of observa-
tions taken at regular intervals. There is yet another form of fore-
casting based on time, termed as naive forecasting. Naive forecast-
ing is an estimating technique wherein the actual of the previous
83
period is considered as the forecast for this period, without adjusting
S
them to create causal factors. Some of the key procedures that are Notes
used in this are: ___________________
___________________
(a) Simple Average: Total demands in prior periods are aggregat-
___________________
ed to calculate simple average.
___________________
PE
sum of demands for all periods ___________________
SA =
Number of periods ___________________
___________________
This technique eliminates deviations caused due to fluctuations
___________________
over time. Although it helps in minimizing deviation from actu-
al results, if the pattern for the survey changes, the method will ___________________
not be able to detect that change. ___________________
Example 11.1: Consider the following 6 month data for a manufac-

turing firm:
Table 11.1: Demand in 6 Periods of a Manufacturing Firm

)U
Period Actual demand D
1 100
2 120
3 80
4 90
5 110
6 70
The forecast for period 7 based on simple average will be
100 + 120 + 80 + 90 + 110 + 70 / 6
= 570 / 6 = 95
(c
b) Simple Moving Average: A moving average forecast uses sev-

eral the most recent actual data values, in generating a fore-
cast.
MA = Sum of demands for a period

Chosen Number of periods
84
Example 11.2: Consider the following data which is available for
S
Notes past 6 periods for a manufacturing firm:
___________________
___________________ Table 11.2– Demand in 6 Periods of a Manufacturing Firm
___________________ Period Actual demand D

1 100
___________________
2 120
PE
___________________ 3 80
___________________ 4 90
5 110
___________________
6 70
___________________
___________________ The forecast for period 7 based on 5-period simple moving average
will be
___________________
120 + 80 + 90 + 110 + 70 / 5
= 470 /5 = 94
The forecast for period 7 based on 3-period simple moving average

will be
90 + 110 + 70 / 3
)U
= 270 / 3 = 90
(c) Weighted Moving Average: A forecast is generated based on

current values of data where current predictions are allocated
weights under Moving average forecast.

past 6 periods for a manufacturing firm:
Table 11.3: Demand in 6 Periods of a Manufacturing Firm

1 100
2 120
3 80
(c
4 90
5 110
6 70
Calculate the 3-period weighted moving average if weights are 0.3,

0.2 and 0.5 (0.3 being the weight of most recent period)
85
The weighted moving average will be
S
Notes
0.3 × 70 + 0.2 × 110 + 0.5 × 90
___________________
= 21 + 22 + 45 = 88 ___________________
___________________
Associative Forecasting
___________________
Variables are identified and are used to forecast some other relevant
PE
variable under the process of Associative Forecasting. ___________________
___________________
For example: Rate of interest is utilised to predict the home refi-
nancing demand. This technique employs linear regression to de- ___________________
velop a succinct equation for understanding the impact of predictor ___________________
variable on forecasted variable. Some of the key procedures used
___________________
in this are:
___________________
(a) Exponential Smoothing: This method uses to past aspects to
get the result. A portion of the past demand and a portion of the
past forecast is used in the measurement or the ascertainment
of the results.Next forecast = Previous forecast + α (actual de-
mand–previous forecast)
Ft = Ft – 1 + (Dt – 1− Ft – 1)
)U
Or Ft = Dt – 1 + (1 − α) Ft – 1
= smoothing constant that represents a percentage of forecast

error
0 1
Exponential smoothing based time series analysis use smooth-
ing constant as a variable which helps with determination as
to how past time series values are calculated. There are higher
chances of suitable reaction in a time series due to more weight
allocation to recent period values which is due to higher smooth-
ing constant.
Selecting the Value of Smoothing Constant

(c
The smoothing constant is:
High – for new products for which demand is shifting.
Low – if the demand is stable.
Moderate –if the demand is moderately unstable.

86
S
Notes past 6 periods for a manufacturing firm:
___________________ Table 11.4: Demand in 6 Periods of a Manufacturing Firm
___________________
1 Actual demand D Forecast
___________________ 1 100 120
2 120 100
___________________
3 80 95
PE
___________________ 4 90 100
___________________ 5 110 135

6 70 80
___________________
Calculate demand for period 7 if smoothing coefficient = 0.2
___________________
___________________ Forecast for period 7
___________________
= α Dt–1 + (1 − ) Ft – 1
= 0.2 × 70 + 0.8 × 80
= 14 + 64 = 78
(b) Forecasting and Linear Trend Function: The trend is the

effect of long-term factors on the series. The long-term trend of
)U
a business, like sales, exports, and production, usually forms a
straight line. The linear trend equation is given below:
Y’ = a + bt
t = specified number of periods
Y = forecast for period t
a = value of Y at t =0
b = slope of the line
Example 11.5: Consider the following data:

Table 11.5: Demand in 5 Periods
Period t Demand D
1 5
(c
2 8
3 9
4 12
5 16
As we can see the demand is on an increasing trend. So, trend equa-

tion will be used to forecast for period 6.
87
Table 11.6: Calculations using values of Table11.5
S
Notes
Period t Demand D Ty T2
___________________
1 5 5 1
2 8 16 4 ___________________
3 9 27 9
___________________
4 12 48 16
5 16 80 25 ___________________
PE
___________________
t = 15
___________________
y = 50
___________________
ty = 176
___________________
t2 = 55
___________________
N=5 ___________________
nå ty - å t å yn
b=
nå t 2 - ( å t ) Ù n
= 880 – 750 / 275 – 225
= 130 / 50 = 2.6
)U
= 50 – 39 / 5 = 11 / 5
= 2.2
So, D = a + bt
D = 2.2 + 2.6 t
For t = 6, D = 2.2 + 2.6 × 6
= 2.2 + 15.6 = 17.8
= 18 (approx.)
Forecasting Error
Forecasting error can be defined as the difference between the real
or the actual result from the forecasted result for a time series. There
(c
are various methods to measure forecast error as mentioned below:
forecast error
Mean Absolute Deviation (MAD) =
n
forecasted demand – actual demand

=
n
88
S
Notes Mean Squared Error (MSE) = (actual demand – forecast)2
n
___________________
___________________ Mean Absolute Percentage Error (MAPE)

___________________
100 n At - Ft
___________________ å A ,
n t =1
PE
t
___________________
___________________
Where At = Actual Value of demand
___________________
Ft = Forecasted value of demand
___________________
___________________
n = Total no. of periods
___________________ Sources of Forecast Errors
● The omission of an important variable
● Irregular variations due to unpredictable circumstances
● Incorrect use of forecasting technique

)U
● Misinterpretation of results
Monitoring Forecast Errors

The tracking signal is useful in monitoring forecast accuracy. Its
technique is helpful in monitoring forecasts that have been the re-
sult of comparison with the actuals and indicates when there are
unanticipated departures of the outcomes from the forecasts. The
formula for tracking signal is given below:
(Actual demand – Forecast

TS =
MAD
When the underlying characteristics of demand change, but the

(c
forecasting model doesn’t; the tracking signal goes out of control.
Normally tracking signal should be within ±4
If the forecasting model is working accurately, the tracking signal

will be close to zero.
89
Example 11.6: Following is the data of actual and forecasted
S
demand. Notes
Table 11.7: Values of Actual Demand and Forecasted Demand ___________________
___________________
Period Actual Demand Forecasted Demand
___________________
1 170 155
2 140 160 ___________________
PE
3 165 130 ___________________
4 170 185
___________________
5 180 170
___________________
6 155 125
___________________
Comment on the suitability of the forecasting technique being used.
___________________
Table 11.8: Calculations using values of Table11.7 ___________________
RSFE Bias TS
RSFE
Actual å( A - F ) å( A - F ) IA - FI
Period Demand Forecast A n n A n /MAD
1 170 155 15 15 15 15 15 1
)U
2 140 160 −20 −5 −5/ 2 = 2.5 20 10 −0.5
3 165 130 35 30 10 35 11.7 2.56
4 170 185 −15 15 3.75 15 3.75 4
5 180 170 10 25 5 10 2 12.5
6 155 125 30 55 9.1 30 5 11
Since the value of TS exceeds 4 in period 5 and 6, the forecasting

technique is no more suitable.
Summary
Forecasting is the method of estimation of future in advance based
on historical data and analysis of present trends. The prediction in-
volves certain statistical tools like time series, cross-sectional or lon-
gitudinal data. Forecasting is different from prediction as it is based
(c
on past data and current trends, whereas prediction is subjective

and is based on instincts. For instance, a weather reporter gives the
forecast of the weather, not the weather prediction. However, the
term ‘prediction’ is used more in general.
Multiple assumptions affect forecasting- like that what has hap-

pened will happen again, or the past may repeat itself and so on.
90
As the horizon of forecast increases, its accuracy decrease. For ex-
S
Notes ample, forecasting the weather for tomorrow will be more accurate
___________________ than forecasting the weather for next month.
___________________ Forecasting can give better and accurate results taken together
___________________ than individually. For example, a car manufacturing company may
forecast with more accuracy for the demand of a total number of cars
___________________
over a year instead of forecasting the demand for a specific car with
PE
___________________
certain package option.
___________________
Qualitative techniques of forecasting are subjective while the quan-
___________________ titative techniques are objective in nature. Qualitative techniques
___________________ are beneficial is infancy stage of product life cycle as relevant past
usage data is not available. Quantitative techniques are time-series
___________________
forecasts and based on associative models.
___________________
For better and accurate forecasting result, the forecasting method
should be chosen carefully. It should provide results that are more
accurate, it should be reliable and consistent, and it should be easy
to use and understand.
Review Questions
)U
1. For the below set of data, calculate the forecasted demand us-
ing the below methods:
a. Simple Average Method
b. Simple Moving Average Method
c. Weighted Moving Average
Table 11.9: Values of Actual Demand in 6 periods
1 105
2 142
3 101
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4 119
5 127
6 131
2. Using Exponential Smoothing method, calculate the forecasted

demand ( se Smoothing coefficient as 0.2, 0.4, 0. ).
91
S
Notes
1 Actual demand D Forecast
___________________
1 50 65
___________________
2 45 51
___________________
3 61 59
___________________
4 74 94
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5 80 71 ___________________
6 78 77 ___________________
___________________
3. Considering the following data, create the equation of Trend-
line and hence calculate the forecaster volume for period 7. ___________________
___________________
___________________
Period t Demand D
1 3
2 4
3 10
4 15
5 18
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6 21
4. Calculate Forecasting Error for the provided data using be-

low-mentioned methods.
Table 11.12: Values of Actual Demand and Forecasted Demand in 6 periods

1 46 58
2 58 51
3 69 72
4 74 77
5 84 78
6 88 89
MAD
(c
MSE
MAPE
5. For the data of actual and forecasted demand (of Question 4),
confirm regarding the suitability of the forecasting technique
being used by using tracking signal
92
Table 11.13: Values of Actual Demand and Forecasted Demand in 6 periods
S
Notes
___________________
1 170 155
___________________ 2 140 160
3 165 130
___________________
4 170 185
___________________ 5 180 170
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___________________ 6 155 125
___________________
___________________
___________________
___________________
___________________
)U
(c
93
Unit 12
S
Notes
Introduction to Statistics
___________________
___________________
___________________
Objectives:
___________________
PE
___________________
\l Primary and Secondary Data
\l Methods of Collecting Primary Data ___________________
\l Designing a Questionnaire ___________________

\l Pre-Testing the Questions
___________________
\l Editing Primary Data
___________________
\l Sources of Secondary Data
\l Precautions in Use of Secondary Data ___________________
\l Census and Sample
Introduction
In order to make any kind of business decisions the management
needs data and statistics. Data is nothing but, information or facts
)U
converted and expressed in quantitative form. Any kind of statis-
tical investigation can be made successful if the statistical data
obtained is accurate and derived from reliable sources. Thus, data
collection plays a vital role in decision making.
Primary and Secondary Data

Statistical data obtained can be classified into 2 categories depend-
ing upon the source from where the data is collected. These terms
are ‘Primary Data’ and ‘Secondary data.’ Primary data is collected
by the statistician for a particular study whereas Secondary Data is
derived from already published sources.
Methods of Collecting Primary Data

(c
1. Observation Method: The investigator collects the required

data while observing the topic under diligence. This method
has few drawbacks like human error. An example of observa-
tion method is a scientist looking at a chemical reaction in an
experiment.
94
2) Questionnaire Method: This method is more widely used, and
S
Notes a questionnaire is created containing all relevant questions
___________________ which are asked of the respondents. Questionnaire method
___________________ can be carried out through personal interview, or by mail or
telephone.
___________________
(i) Personal Interviews or In-house questionnaire:
___________________
This is the best method to gain most reliable information
PE
___________________
as the interviewer and respondent sit together and then
___________________ exchange information. The information here is gained by
___________________ evaluating a number of things when the interviewee is
answering the questions. Furthermore, the information
___________________
gained from personal interviews is reliable, accurate
___________________ and free from any sort of distortions. However, this is
___________________ time-consuming and costly.
(ii) Mail Questionnaire: This method is quite easy and ef-

fective when the number of respondents is vast, and they
are spread over in various places. A mail questionnaire
is developed and sent to all the respondents. The respon-
dents study it, complete it out and send it back to the
interviewer. This method is easy and cost-effective and
)U
saves time. The only drawback is that all the respondents
should be literate.
(iii) Telephone: The interviewer will ask the questions over

a telephonic communication and gain the requisite in-
formation from the respondent. Although this method is
easy and time-saving, the method’s results depend on the
respondent’s access to phones.
In cases where the information required is of personal nature,

the respondent might not be willing to share the information
presents a limitation to the questionnaire method which is oth-
erwise an effective and quick method for data collection. Also,
there can be inconsistency in the answers and inaccuracy in data
collected as different people interpret questions differently.
(c
The next step in the questionnaire method is to draw up a de-

sign of the survey.
Following are the steps in designing a survey:
1. Designing a Questionnaire
Unit 12: Introduction to Statistics
95
2. Pre-Testing a Questionnaire
S
Notes
3. Editing the Primary data
___________________
Designing a Questionnaire ___________________
Designing a questionnaire skilfully and imaginatively is import- ___________________

ant for the success of collection of the data. The questionnaire, if
___________________
designed correctly will yield a relevant and useful data. While the
PE
___________________
questionnaire is designed, essential facts such as below need to be
taken care of: ___________________
1. Covering Letter: A cover letter is an important aspect of a ___________________

questionnaire. The cover letter assures the respondent that all ___________________
the information gained will be confidential.
___________________
2. Minimum Number of Questions: The lesser the number of
___________________
questions, higher the chances of getting answers to all the ques-
tions in the questionnaire. These questions should fulfill the
motive of study.
3. Simple, Short and Unambiguous Questions –
Questions should be simple, short and easily under-

standable
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While designing the questions, it must be remembered that
in respondent’s mind there should be no chances of ambigui-
ty. For instance – If the respondents are asked the question,
“are you literate?”, the question will have different meanings
for all respondents. Some would think it means the qualifica-
tion, while others would think the question is asking them if
they can read or write. Therefore, to avoid confusion on the
meaning of the question and to remove ambiguity, Yes/No
questions are given, and open-minded or questions with mul-
tiple meanings are avoided. The questions must not be very
long as this would make the reader exhausted. Additionally,
the language used in the questionnaire must be easily read-
able and designed in such a manner that it i is easily under-
stood by the reader.
(c
Sensitive/Personal information related questions should

be avoided
The questions in the questionnaire should try and avoid ask-

ing personal and sensitive information about monthly income,
sales, profits, marital happiness, etc. If the questionnaire has
96
important questions, and these questions are required to per-
S
Notes form a survey, a disclaimer with them should be provided stat-
___________________ ing that the information will not be shared or used for other
___________________ purposes than for calculating the results of the survey.
___________________ Calculation oriented questions should be avoided

___________________ It is essential to make sure that the respondents are not re-
PE
___________________ quired to perform any sort of difficult calculations whilst an-
swering the questions. For example, The questionnaire must
___________________
not demand that the respondent calculates the difference in
___________________ cost of different products, the exact time in minutes and sec-
___________________ onds consumed to use a particular product, or the complicated
calculations like determining the hidden charges included in
___________________
the price of a product.
___________________
Logical arrangement
The survey questions should follow a logical sequence which

should not require the respondents to refer the previous ques-
tions to answer new questions. Also, some introductory infor-
mation should be provided for the questions which require de-
tails to be understood by the respondents. For example, it is
)U
essential that before interrogating about the age of an individu-
al, the date of birth of the individual must be mentioned, which
is very commonly found in any questionnaire.
Cross-check and Footnotes
There must be questions which are necessary for validation

purpose as well as cross-checking of information. For example
– A question related to income details should also ask whether
the respondent in income tax payee.
To eliminate doubts and confusion for the respondents, the

questions should come with footnotes. With the help of these
the questions will be less confusing, for instance, the question
with income limits, 1000, 2000, 3000, etc. is straightforward,
and the respondent with income of 2000 knows where they
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belong.
Pre-Testing the Questionnaire

Questionnaire should be tested with a sample target audience be-
fore being sent to respondents. Pre-testing can be helpful in many
ways as mentioned below:
97
● It allows rectification of problem, removal of inconsistencies,
S
repetitions, etc. Notes
___________________
● It allows us to make the required amendments (including addi-
tions and removal of questions) in the survey questions before ___________________
going for the main survey work. ___________________
● For better reliability of results, another round of pre-testing ___________________
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can be done for better accuracy of data thus obtained but only if ___________________
there are adequate resources and time.
___________________
Editing Primary Data ___________________
Once the questionnaire is completed, and primary data is collected, ___________________

it is mandatory to edit this data to ensure completeness, consisten-
___________________
cy, accuracy, and homogeneity.
___________________
● Completeness: The questionnaire must be filled completely by
the respondent. If it so happens, that certain parts of the ques-
tionnaire are left unanswered, attempts to get in touch with
respondent must be made. However, if the respondent cannot
be contacted or refuses to complete the questionnaire, the ques-
tionnaire can be avoided, and the matter in the questionnaire
)U
should not be used for the survey.
● Consistency: Questionnaires should be reviewed to check for

consistency in the responses to avoid any contradicting infor-
mation. For example The answers in a questionnaire to two
questions in successions are “Are you married?” and “the num-
ber of children you have?” may be given by a respondent as `No’
and `Two’ respectively, which creates an inconsistency in the
questionnaire. This should be cleared out with the respondent.
● Accuracy: Accuracy of information should also be ensured in

the questionnaire. It is quite a challenging task and time con-
suming too, for the investigator. If inaccuracies are permitted
in the questionnaire responses, it may lead to projecting incor-
rect picture as the final output. For example, if age is 14, qual-
ification cannot be post graduate. Hence, inaccuracies such as
(c
false address, fake qualification, and false age, can be checked

by random cross-checking.
● Homogeneity:The questions in the questionnaire should be

clearly understood by the respondent. For example: If a ques-
tion relates to matters related to incomes, the question should
98
clearly state whether the respondent requires answering the
S
Notes question in terms of a week, in terms of a month or on the daily
___________________ term. Ambiguous questions in a questionnaire will inevitably
___________________ lead to ambiguous answers, which will only hamper the survey
results.
___________________
___________________ Sources of Secondary Data
PE
___________________ Secondary data sources can be categorised as Published Data and
Unpublished Data.
___________________
___________________ Published Sources

___________________ There are various international and national bodies and organiza-
tions that collect and store statistical data. These bodies also use
___________________
the data to perform various surveys and come to various conclusions
___________________
and publish their findings periodically. Some of these organizations
are mentioned below:
● Indian Council of Agricultural Research (ICAR)
● Central statistical organization (CSO)
● nited Nations Organization ( NO); World Health Organiza-

)U
tion (WHO); International Labour Organization (ILO); Interna-
tional Monetary Fund (IMF); World Bank, etc. provide data on
political and socio-economic confirmation over the world.
● Labour Bureau
● Office of the Registrar General and Census Commissioner of

India
● The Economic Times; The Financial Express, etc National

Sample Survey Organization (NSSO)
Federation of Indian Chambers of Commerce and Industry
Unpublished Sources
It is not necessary for every statistical data to be published. A great
example of unpublished sources includes the records kept by the
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government. The data here may refer to the number of employees,

the amount of their pay, the raw materials used, cash book, etc. Get-
ting access to this unpublished information is very difficult, as they
are not available as free source. It requires permission, or you need
to purchase it from its owner.
99
Secondary Data Usage Precautions
S
Notes
Prior to utilising data from secondary sources due caution is necessary.
___________________
Such data can’t and shouldn’t be accepted at face value. The reason is
that the data can be full of errors or can be biased. Following points ___________________
should be kept in mind for the same of accuracy and consistency: ___________________
Suitability: The investigator should ensure that the data in hand ___________________
PE
is useful for his/her questionnaire or not. Comparison of the nature ___________________
and scope of investigation can be used for this purpose.
___________________
Reliability: The investigator needs to be confident about using the ___________________
secondary source data about the reliability, credibility, unbiased na-
___________________
ture, and homogeneous sampling nature of the data.
___________________
Adequacy: Investigator should ensure that the secondary source
data is adequate and serves the purpose of investigation. More im- ___________________
portantly, the data shouldn’t be time bound.
Census and Sample: When secondary data is not available, an in-

vestigator can collect primary data through investigations. In case
the information is collected by each and every item in population, it
is known as census or complete enumeration survey. For example:
)U
Investigating about the number of deaths of infants in a year.
Under the sampling method, investigator make inferences about the

whole population based on information collected from a representa-
tive part of total population. For example: Investigating about the
deaths caused due to cancer in a year.
The main advantage of census method is the fact that detailed and
accurate information can be obtained about every item. That said,
the primary constraint of time and money restricts usage of the cen-
sus method. In most cases, the census is not required. Judicial choice
of samples and key inferences which are correct will do the trick.
It should also be noted that in practical life, the Sampling method is

used popularly against the census method.
(c
Summary
Statistics is a mathematical body of science that deals with the col-
lection, analysis, interpretation, presentation, and organization of
data. It describes the observations in a measure of location or cen-
tral tendency, statistical dispersion, the shape of the distribution,
and when one or more variable is measured.
100
There are sometimes when census method cannot be followed such
S
Notes as in cases where elements of the population cannot be measured,
___________________ small groups of individuals or elements are selected from the pop-
___________________ ulation at random for the study. The inference is drawn from the
sample of the population. For instance, a firm is planning to buy
___________________
500,000 electric switches form a manufacturer. The firm will buy
___________________ the switches only if no more than 1 percent of switches are defective.
PE
___________________ Hence, in this condition, it is practically not possible to test each
switch. A sample of 500 switches is taken and tested for defects.
___________________
The result of the tests is further used to estimate the percentage of
___________________ defective switches in the population.
___________________
The use of statistics is prevalent in applied statistics, theoretical
___________________ statistics, and mathematical statistics, machine learning, and data
___________________ mining, in a wider variety of academic disciplines such as natural
and social sciences, government and business. Statistical consul-
tants also help those firms and organizations that do not have ex-
pertise solutions to their problems.
Review Questions
)U
1. What is the difference between Primary and Secondary Data?
What are the limitations of both Primary and Secondary Data?
2. What are the different methods of collecting Primary Data?

Mention the advantages of each method.
3. Surya Pvt. Ltd. is launching a new brand of biscuit in the mar-

ket and wishes to conduct market research for the same. Which
method should be used to collect the most reliable data?
4. What is sampling? Explain the advantages and limitations of

sampling over the census.
(c
101
Unit 13
S
Notes
Statistics
___________________
___________________
___________________
Objectives:
___________________
PE
___________________
\l Statistical Data
\l Quantitative Data and Qualitative Data ___________________
\l Discrete Form of Data ___________________

\l Continuous Form of Data
___________________
\l Frequency Distribution
___________________
Statistical Data ___________________
Any information or facts when collected, presented and organized in

a meaningful form is called Statistical Data. We have learned in the
previous chapters about primary and secondary data. Below are few
basic terminologies which are frequently used in statistics:
● Primary data are collected specifically for the analysis desired.

)U
● Secondary data have already been compiled and are available
for statistical analysis.
● A variable is an item of interest that can take on many different
numerical values.
● A constant has a fixed numerical value.
Data
Data is a set of values of qualitative or quantitative variables. It
is a raw or unorganized form of information that represents ideas,
objects, or conditions which is limitless and is present everywhere.
Data is measured, collected, reported and analyzed, upon which it

can be evaluated using images, graphs, or other tools.
(c
Data can be classified into 2 categories, namely:
● Qualitative: Data which does not have a numerical value and

a unit of measurement
● Quantitative: Data which have a numerical value and a unit

of measurement
102
Quantitative Data
S
Notes
As discussed quantitative data have a certain value or a unit of
___________________
measurement attached to it. For example student’s grades, average
___________________ rainfall experienced in a state, number of runs scored by a batsman
___________________ in a test series, etc. There are 2 categories or subgroups of this
quantitative data:
___________________
PE
___________________
● Discrete: It is the result of counting (the number of students of
a given ethnic group in a class, the number of books on a shelf,
___________________
etc. The data takes a particular value like 15 books on a shelf,
___________________ 60 students in a class, or 12 players in a field.
___________________ ● Continuous: It is the result of measuring (distance traveled,
___________________ the weight of luggage, etc. The data takes the range of values ,
such as the weight of the students in the class ranges from 45
___________________
to 55 kilograms.
Now, we shall learn about the Frequency Distribution Table

and its application
● re uency istri ution a le: When observations, discrete

or continuous, are available for a single characteristic or vari-
able for a large or small group of individuals, it is highly im-
)U
portant to condense the data and arrange it without losing any
information under experiment. Let us consider an example of
marks scored by 20 students in 5 subjects (max marks are 500)
in an examination. Below is the table which provides the data.
Marks Scored by Individuals in 5 Subjects Out of 500
Table 13.1 – Total Marks Scored by Individuals in 5 Subjects Out of 500
340.4 330.9 340.4 331.2 335.7

337.6 330.2 340.4 341.3 335.7
339.7 320.5 345.1 340.4 335.7
330 334.2 332.8 330.9 340.4
The above representation of data does not provide any meaningful

information. It would be much more feasible if the data is arranged
(c
in an ascending or descending order.
The data in the frequency distribution table can be better represent-

ed using tally marks.
Tally marks is a method to keep track of numbers in groups of five.

A vertical line is used to denote each of the four numbers at first.
Unit 13: Statistics
103
The fifth number is denoted by a diagonal line drawn across the first
S
four numbers. Notes
___________________
The representation of data in the tabular form as given below is
called a grouped frequency distribution. In this table, the class inter- ___________________
vals is a discrete variable which contains the value of marks scored ___________________
by 20 students is denoted by ‘x’. The number of students will refer to
___________________
the frequency ‘f’ of the variable.
PE
___________________
Table 13.2: Frequency Distribution of Total Marks Scored by 20 Students
___________________
in 5 Subjects
___________________
Class Tally mark f F (Cumulative f)
320.45 – 325.35 1 1 ___________________
325.35 – 330.25 2 3 ___________________
330.25 – 335.15 5 8
___________________
335.15 – 340.05 5 13
340.05 – 344.95 6 19
344.95 – 349.85 1 20
Number of observations = 20
Number of classes = 20 = 4.47 = 5

)U
Smallest value = 320.5
Largest value = 345.1
Range = 24.6
Class width = 24.6 / 5 =4.92 = 5
Summary
Statistics is defined as the mathematical science that centers on data
collection, analysis, data interpretation, presentation, and organiza-
tion. In the application of statistics to a scientific or an industrial
problem or a social problem, it is important to start with a statistical
model process to be studied.
Statistics normally describes the observations in a measure of lo-

(c
cation or central tendency, statistical dispersion, the shape of the

distribution, and when one or more variable is measured.
The use of statistics is prevalent in applied statistics, theoretical

statistics, and mathematical statistics, machine learning, and data
mining, in a wider variety of academic disciplines such as natural
and social sciences, government and business. Statistical consultants
104
also help those firms and organizations that do not have expertise
S
Notes solutions to their problems. It is also applied to mathematics or the
___________________ arts. Statistical techniques are used in different scientific and social
___________________ research, like biostatistics, network biology, social science, sociolo-
gy, and social research.
___________________
___________________ Review Questions
PE
___________________
1. If a sample data has 25 observations, calculate the number of
___________________ classes in the frequency distribution table.
___________________ 2. For a number of observations as 50, if the smallest observation
___________________ is 254 and largest observation is 302. Determine the range.
___________________
___________________
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(c
105
Unit 14
S
Notes
Graphical Representation
___________________
___________________
of Data ___________________
___________________
PE
Objectives: ___________________
___________________
\l Graph and Types of Graphs
___________________
\l Representation of Data in the Form of Graphs
___________________
A graph gives a pictorial representation of the data for better under- ___________________
standing, and to comprehend and analyze the data easily. Graphical
___________________
representation of data will also facilitate the comparison between 2
or more frequency distributions.
Primarily there are 3 main categories of graphs:
● Bar Graphs
● Pie Charts
)U
● Line Graphs
Below is the sample data which we will show in all forms of graphi-
cal representations:
Table 14.1: Sample Frequency Distribution
Serial No Observation (X) Frequency (f)

1 340.4 5
2 330.9 2
3 331.2 1
4 335.7 3
5 337.6 1
6 330.2 1
7 341.3 1
8 339.7 1
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9 320.5 1
10 345.1 1
11 330 1
12 334.2 1
13 332.8 1
106
Bar Graph
S
Notes
___________________ A bar graph comprises 2 axis’s, namely, X-Axis and Y-Axis. These
axis’s take values of 2 variables, observation(x) and its frequency(y).
___________________
There are primarily two types of bar graphs:
___________________
● Vertical bar graphs
___________________
● Horizontal bar graphs
PE
___________________
___________________
30
___________________ Frequency (f)
___________________ 25
___________________
20
___________________
15
10
5
)U
0
1 2 3 4 5 6 7 8 9 10 11 12 13
Graph 14.1: Vertical Bar Graph representation of Frequency Distri-

bution
13
12
11
10
9
8
7
6 Frequency (f)
5
(c
4
3
2
1
0 5 10 15 20 25 30
Graph 14.2: Representation of Frequency Distribution in the

Form of Horizontal Bar Graph
Unit 14: Graphical Representation of Data
107
Pie Charts
S
Notes
The pie chart is a graph which represents the proportion of all obser- ___________________
vations in a circle by dividing it among sectors as per their weightage.
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
___________________
Graph 14.3: Frequency distribution displayed in the form

of Pie Chart
Line Graph
)U
The line graph represents the data pictorially. It represents the data
in the form of connected lines.
30
24
25
21 22
20
15
15
12
10
9
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8 7 6
5 5
4
3 3
0
1 2 3 4 5 6 7 8 9 10 11 12 13
Graph 14.4: Representation of Frequency Distribution in the Form

of Line Graph
108
Summary
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Notes
___________________ The graphic representation is a way to analyze numerical data. A

graph is a type of chart by means of which statistical data are rep-
___________________
resented in the form of lines or curves drawn across the coordinated
___________________ points plotted on its surface.
___________________
Graphs help us to study the cause-and-effect relationship between
PE
___________________ two variables. It helps in measuring the level of change in one vari-
___________________ able when another variable change by a specific amount.
___________________ It also helps in the study of time series and frequency distribution,
___________________
since they give a clear account of the problem. Moreover, it is also
easy to understand and attractive to the eye.
___________________

1. For the provided set of data, prepare a Horizontal bar graph.
2. For the provided set of data, prepare a vertical bar graph.
3. For the provided set of data, prepare a pie chart.
4. For the provided set of data, prepare line graph.

)U
Serial No Observation (X) Frequency (f)
1 248 15
2 332 24
3 339 21
4 378 12
5 338 3
6 340 8
7 341 3
8 342 9
9 343 4
10 344 7
11 345 5
12 346 6
13 347 22
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109
Unit 15
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Notes
Case Study: Analysis of

___________________
___________________
Seasonality in Sales ___________________
___________________
Way2Go Printing Company was established in the year 1975. It is
PE
an unlisted company whose only branch of operations is in Kota, ___________________
Rajasthan. Way2Go Printing Company publishes books of various
___________________
authors, mainly dealing with the technical and academic back-
ground. It also prints newsletters but is famous for its in-house ___________________
publication of Q&A series for all Engineering subjects.
___________________
Since, Kota is an educational hub in Rajasthan with numerous ___________________
coaching institutes, schools, and colleges. The printing compa-
ny has seen tremendous a growth over the years. The company’s ___________________
growth rate is positive but nothing compared to its growth over the
last 10 years. This may be due to the large internet penetration and
increase in demand of E-books that the demand for hard-bound has
significantly reduced.
The company also experiences a trend in its total annual sales

where the sales are high during few months of the year and signifi-
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cantly low in the others.
Below is the data for the annual sales of the company from the year
2001 – 2008:
SALES OF THE WAY2GO PRINTING COMPANY,

2001-2008 (IN Rs. Crores)
Month/
Year 2001 2002 2003 2004 2005 2006 2007 2008
January 13.7 14.5 16.9 19.8 21.9 25.6 24.1 23.4
February 16.9 19.1 21.6 24 25.3 28.8 28.1 28.4
March 17.5 21.6 24 25.7 31.8 35.2 32.6 35
April 16.6 17.9 20.3 23 27.1 28.4 26.9 27.9
May 15.4 17.7 19.2 21.5 25.1 27.4 25.7 26.3
June 15.2 16.3 18.8 21.3 24.5 26.1 25.1 25.7
July 13.7 13.1 16.6 18.3 20.7 24.2 22.8 24.4
August 14.1 13.7 16.4 19.6 21.3 25.9 24.2 22.6
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September 14.3 15.3 16.8 20.1 22.7 25.3 24.1 22.8

October 14.8 15.6 18.1 20.7 20.8 25.5 25.1 23.3
November 13.4 12.9 15.7 17.8 20.6 24.5 21.5 22
December 13.6 13.1 15.9 17.9 19.8 22.5 21.6 22.1
Cont.d
110
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The company hires an analyst to compute an index of seasonal
Notes
variation using the method of the ratio of the two-item average of a
___________________ 12-month moving average. se arithmetic mean of specific season-
al and, if necessary, a leveling factor.
___________________
The company also wishes to compute the variation along the time
___________________
series data of the annual sales and forecast the sales for the next
___________________ financial year.
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___________________ Forecast demand for all months of following year.
___________________
___________________
___________________
___________________
___________________
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BLOCK–IV
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Detailed Contents
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UNIT 16: CENTRAL TENDENCY OF DATA ll OR Techniques
ll Arithmetic Mean ll Phases of OR Study
ll Mode ll Application of OR
ll Median ll Limitation of OR
ll Summary ll Summary
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ll Review Question ll Review Questions
UNIT 17: MEASURES OF DISPERSION UNIT 19: LINEAR PROGRAMMING

ll Mean Deviation ll Introduction
ll Variance ll Summary
ll Standard Deviation ll Review Questions
ll Coefficient of Variance
UNIT 20: CASE STUDY: ON ROAD TO ACHIEVE
ll Summary OPTIMAL PRODUCTION: GYS CHEMICALS
ll Review Questions
UNIT 18: APPLICATIONS OF QT IN RESEARCH

TECHNIQUES/OPERATIONS TECHNIQUE
ll Introduction
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113
Unit 16
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Notes
Central Tendency of Data

___________________
___________________
___________________
Objectives:
___________________
After completion of this unit, you will be able to describe the following:
PE
___________________
\l Mean, Median and Mode of Grouped and Ungrouped Data
___________________
The central tendency of data measures the values centered on the ___________________
frequency distribution and thus represents the entire distribution.
___________________
● We will be focusing on the 3 measures of central tendency in ___________________
case of both grouped and ungrouped frequency distribution.
___________________
Mean or Arithmetic Mean
● Median
● Mode
Arithmetic Mean
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An arithmetic mean is the result of the summation of all observa-
tions further divided by the total number of observations. In case of
ungrouped frequency distribution, Let us explain this by using an
example; refer to the values obtained from Table 16.1
Table 16.1: Sample Ungrouped Frequency Distribution
X F
340.4 5
330. 2
331.2 1
335.7 3
337.6 1
330.2 1
341.3 1
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33 .7 1
320.5 1
345.1 1
330 1
334.2 1
332.8 1
114
The Mean or Arithmetic Mean(AM)= ∑x / n
S
Notes
Where x = Sum of all the values of x
___________________
___________________ n = Total number of observations or ∑f (sum of all frequencies)
___________________ Sum of the values = 6713.5

___________________ Number of values = 20
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___________________
Mean = ∑x / n = 6713.5.1 / 20 = 335.675
___________________
In case of grouped frequency distribution – Let us explain this by
___________________ using an example; refer to the values obtained from Table 16.2
___________________
Table 16.2: Sample Grouped Frequency Distribution
___________________
Mid-point
___________________ Class f F (X) fx
320.45 – 325.35 1 1 322. 322.
325.35 – 330.25 2 3 327.8 655.6
330.25 – 335.15 5 8 332.7 1663.5
335.15 – 340.05 5 13 337.6 1668
340.05 – 344. 5 6 1 342.5 2055
344. 5 – 34 .85 1 20 347.4 347.4
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Here, the middle value of the class interval is considered as the val-
ue of x. Mean = ∑ fx / ∑ f = 6712.4/20 = 335.62
Mode
The frequent occurrence of particular value in a set of observations
is termed as the Mode of the frequency distribution. For example,
the average height of an Indian Male is 5’.6” – This is the mode it
explains that most of the Indian males would have 5’.6” as their
height.
In case of ungrouped frequency distribution, refer to Table 16.1 and

observe that the value of x = 340.4 occurs the maximum number of
times (5 times). Thus, the Mode of the observation is 340.4
(c
In case of grouped frequency distribution, refer to Table 16.2, and

you will observe that although the modal class is ‘340.05 – 344. 5’
but this isn’t the Mode.
Mode = 1 + [D1/ (D1+D2)] * c

Unit 16: Central Tendency of Data
115
Where, D1 = frequency of the modal class – frequency of the preced-
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ing class Notes
___________________
D2 = frequency of the modal class – frequency of the follow-
ing class ___________________
___________________
C = range of the modal class
___________________
⇒ D1 = 6 − 5=1
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___________________
⇒ D2 = 6 − 1=5
___________________
⇒ C = 344. 5 – 340.05 = 4. ___________________
Mode = 340.05 + 1 / (1 + 5) × 4. ___________________
= 340.87 ___________________
___________________
Median
A Median is defined as the value that equally divides the whole
frequency distribution into two parts. This is the value which is
succeeded and preceded by the same number of observations. This
means that the value possesses equal number of observations on
either side. Thus, it is also called a positional average.
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Determination of Median firstly requires the data to be arranged in
ascending or descending order. In case the number of observations
is odd, then the middle value or (N/2) of X is the Median value. For
even number of observations, the average of the two middle values
of x constitutes the value of Median.
In case of ungrouped frequency distribution, refer to Table 16.1 and

observe that the total number of observation is 20. Thus, 10th value
= 335.7 and 11th value = 335.7. Hence,
Median = 335.7
In case of grouped frequency distribution – refer to Table 16.2 and

observe ‘CF’ which is calculated below in Table 16.3
The running total of frequencies, which is the summation of all the

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previous frequencies, added up to the current position is termed as

Cumulative Frequency. The frequency of an element in a set indi-
cates how many of that element there are in the set
116
Table 16.3: Calculation of Cumulative Frequencies in the Grouped
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Notes Frequency Distribution
___________________ Class F CF
320.45 – 325.35 1 1
___________________
325.35 – 330.25 2 3
___________________
330.25 – 335.15 5 8
___________________ 335.15 – 340.05 5 13
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340.05 – 344. 5 6 1
___________________
344. 5 – 34 .85 1 20
___________________
Median Class is the class interval corresponding to the ‘CF’ which is
___________________
just greater than N/2. In this case class interval, ‘335.15-340.05’ will
___________________ be the median class.
___________________
Median = L + [(N/2 – F) / f] x c
___________________
Where, L = Lower limit of the median class
N = Total number of observations
F = The ‘CF’ preceding the median class
C = Range of the median class
= 335.15 + (10 – 8) / 5 × 4.
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= 337.11
Summary
Central tendency refers to a central or a typical value for a probabil-
ity distribution. The Arithmetic Mean, Median, and Mode constitute
the measures of Central Tendency. These measures help in solving
variation problems They are used to calculate average production,
average wage, average cost, per capital income, exports and imports,
consumption, and prices. They are further used in problems related
to the distribution of income, wealth and investment.
Review Questions
1. Table 16.4, shows the values when 8 coins were tossed together
(c
and number heads resulted was noted. This process was re-
peated 256 times
Table 16.4: Frequency Distribution of Number of Heads Appearing When
Tossed for 256 Times
x: 0 1 2 3 4 5 6 7 8
f: 1 26 5 72 52 2 7 1
Unit 16: Central Tendency of Data
117
Calculate mean, median and mode for the above frequency
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distribution. Notes
___________________
2. Table 16.5, shows the distribution of age of 1000 workers work-
ing in a large manufacturing unit: ___________________
Table 16.5: Frequency Distribution Showing Age of 1000 Worker ___________________
___________________
Age Group No. Of Persons
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20-25 30 ___________________
25-30 160
___________________
30-35 210
35-40 180 ___________________
40-45 145 ___________________

45-50 105
___________________
50-55 70
55-60 60 ___________________
60-65 40
Calculate mean, median and mode of the above distribution.

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119
Unit 17
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Notes
Measures of Dispersion
___________________
___________________
___________________
Objectives:
___________________
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___________________
\l Dispersion
\l Mean Deviation ___________________
\l Standard Deviation ___________________

\l Variance
___________________
\l Coefficient of Variance
___________________
The literal meaning of dispersion is ‘scatteredness.’ Dispersion helps ___________________
in assessing the heterogeneity or the homogeneity of the data at

hand. Heterogeneity is indicated when the data is more scattered,
and heterogeneity is defined when the data is less dispersed. There
are various measures of dispersion few are explained as follows:
Mean Deviation
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As the name suggests, it measures the deviation from the average
value or the mean value. Mean deviation from average value (or
mean) is given by;
Mean deviation = ∑ | – |/∑f
Consider Table 17.1 and refer to the values obtained.

Table 17.1: Sample Frequency Distribution
X (x – x) (x – x)
340.4 4.7 4.7
337.6 1. 1.
33 .7 4.0 4.0
330.0 –5.7 5.7
330. –4.8 4.8
(c
330.2 –5.5 5.5

320.5 –15.2 15.2
334.2 –1.5 1.5
340.4 4.7 4.7
340.4 4.7 4.7
345.1 .4 .4
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X (x – x) (x – x)
Notes
332.8 –2. 2.
___________________ 331.2 –4.5 4.5
___________________ 341.3 5.6 5.6
340.4 4.7 4.7
___________________
330. –4.8 4.8
___________________
335.7 0 0
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___________________ 335.7 0 0
335.7 0 0
___________________
340.4 4.7 4.7
___________________
___________________ Mean deviation = (x – x) / f

___________________
= 8 .3 / 20 = 4.465
___________________
Hence, the mean deviation from mean is 4.465. This means the de-
viation from the average value or the mean value for the given data
is 4.465.
Variance
Variance is the difference between numbers or the spread between
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numbers in a given dataset. The variance measures how far a num-
ber is set from the mean value. Variance = ( –) 2 / (n – 1)
Consider Table 17.1 and refer to the values and Table 17.2 for cal-
culation of variance
Table 17.2: Table for Calculating Variance Using Values from Table17.1
x (x – x) (x – x)
340.4 4.7 22.0

337.6 1. 3.61
33 .7 4.0 16.0
330.0 –5.7 32.4
330. –4.8 23.04
330.2 –5.5 30.25
320.5 –15.2 231.04
(c
334.2 –1.5 2.25

340.4 4.7 22.0
340.4 4.7 22.0
345.1 .4 88.36
332.8 –2. 8.41
331.2 –4.5 20.25
Unit 17: Measures of Dispersion
121
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x (x – x) (x – x)
Notes
341.3 5.6 31.36
___________________
340.4 4.7 22.0
330. –4.8 23.04 ___________________
335.7 0 0 ___________________
335.7 0 0
___________________
335.7 0 0
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340.4 4.7 22.0 ___________________
___________________
Variance = (x – x)^2/ (n – 1)
___________________
= 620.55 / 1 = 32.66
___________________
Hence, the variance is 32.66. This further implies that the calculat- ___________________
ed arithmetic mean of the squares of the deviation of a certain value
___________________
from their arithmetic mean for the above data is 32.66.
Standard Deviation
Standard deviation is the positive square root of the variance.
If we consider the same data from table 17.2 to calculate standard

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deviation, the standard deviation would be as follows.
Standard deviation = √32.66 = 5.72
Coefficient of a iance
The coefficient of variance is a standardized measure of dispersion.
The coefficient of variance is computed by the ratio of standard devi-
ation to the mean. It is expressed as a percentage and is the ratio of
standard deviation s to the mean m. It can also be explained as the
percentage deviation in the mean.
It is helpful while comparing the variance in 2 or more frequency

distributions. The series which have a higher value of CV is said to
be more variable as compared to the one which has a lower value.
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CV = (SD/mean) × 100
= (5.72/335.7) = 1.7
Hence, the coefficient of variance is 1.7 . This means the standard-

ized measure of dispersion for the given data is 1.7 .
122
Summary
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Notes
___________________ Dispersion is the extent up to which a distribution is stretched or

squeezed. Its common examples are variance, standard deviation,
___________________
and interquartile range. The measures of dispersion are sued in
___________________ solving problems related to different disciplines, like physical sci-
___________________ ence, biological science, economics, finance, and mathematics. It is
also helpful in solving various business problems.
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___________________

___________________
1. Calculate the mean, mean deviation and variance for the fol-
___________________ lowing table providing the age distribution of 542 workers.
___________________ Table 17.3 – Age Distribution of the Workers
___________________ Age (in 20 – 30 30 – 40 40 – 50 50 – 60 60 – 70 70 – 80 80 – 0

Years):
No of 3 61 132 153 140 51 2
workers:
2. Monthly wages of 2 firms are analyzed which belong to the

same industry. Below are the results:
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Table 17.4 Analysis of Wages Distribution of 2 Firms
Firm A Firm B
No of workers 500 600
Average Daily Wage Rs 186 Rs 175
The variance of distribution of the wages 81 100
Answer the following questions:
(a) Which firm has larger wage bill?
(b) Which firm has greater variability in its wages?
(c) Calculate the average daily wages of the 2 firms taken

together.
(c
123
Unit 18
S
Notes
Applications of QT in Research
___________________
___________________
Techniques/Operations ___________________
Technique ___________________
PE
___________________
Objectives: ___________________
After completion of this unit, you will be able to explain the following: ___________________
\l Operations Research (OR) and Its Characteristics ___________________
\l Techniques in OR
___________________
\l Phases of OR
___________________
\l Applications of OR
\l Limitation of OR
Introduction
OR or operational research is a mathematical method of analysis
to provide duodecimal results to aid decisions using quantitative
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techniques. Most of our daily decisions are based on common sense
and expertise and not around any mathematical models. But the
problems which require operational research are complex, and the
decisions to be made around them are heavily impacting too. For
example The operational research to be conducted for the network
planning of a public transportation in a city, as it would have a lot
of population, roads, factories, residential societies, and highways.
Considering factors such as the demand for public transports and
the availability of roads makes the process of operational research
complex, thereby impacting the decision. OR tools not only use a
particular discipline but involve different disciplines like mathemat-
ics, statistics, economics, engineering, etc. The model combines the
various aspects of the problem and allows us to come to a solution
after a thorough analysis. The primary feature of the OR is to offer
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us a rational angle of thinking for the problem. The operational re-

search breaks down complex problems and makes it easy for us to
understand and aids the decision-making process in the absence of
information. Implementation of the Operation Research technique
improves the effectiveness of various kinds of operations, aids in de-
cisions and offers better management with the help of an analysis
124
of data, proposing innovative approaches and allowing us to create
S
Notes various mathematical models. The OR professionals create and de-
___________________ velop many models that give perception and a framework for deci-
___________________ sion making
___________________ OR specialists are involved in three main categories of science as

___________________
mentioned below:
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___________________ ● To determine the behaviour of the system
___________________ ● Analysing the behavior by developing appropriate models.
___________________
Predict the future behavior of the model so developed background
___________________ of OR
___________________
OR first started in the domain of military, post which, its use has
___________________ spread across other governmental departments and industries. A
committee was formed by National research Council in SA to find
out real solutions for complex problems.
Today most of the organizations use OR techniques to find solutions

for the managerial and industrial problems. Because of the increase
in efficiency with the operation research model, many Indian com-
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panies have also implemented the same for their daily activities.
Indian Railways, Tata Iron and Steel, Indian Airlines, are good ex-
amples of such Indian organizations. Characteristics of OR
The noteworthy features of OR include the following:
(i) Decision-Making: OR techniques aim to provide an optimal,

analytical and judicious solution for industrial problems.
This is achieved by analyzing and understanding the prob-
lem and devising scientific methods to find a solution for the
problem.
ii cientific A roac : OR applies scientific methods to ar-

rive at a solution for a complex industrial problem. In this
approach, there is very less scope of subjectivity and person-
al biases to arrive at the solutions.
(c
(iii) Inter-Disciplinary Team Approach: As complex indus-

trial problems have issues which require finding a solution
from various domains like; science, mathematics, analytics,
etc., therefore requires a team effort of scientists, mathema-
ticians, analysts and technocrats who jointly work to obtain
an optimal solution of the problem.
Unit 18: Applications of QT in Research Techniques/Operations Technique
125
(iv) System Approach: The primary function of the OR system
S
is to work on various proposals, and the evaluate their effects Notes
and then generate a solution in reference to the effects on ___________________

the entire system as a whole. The Systems Approach produc- ___________________
es a complete picture by arranging the interdependent and
___________________
interrelated parts in a certain manner. Example: For achiev-
ing specific goals, a team of qualified employees is usually ___________________
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formed. ___________________
Mathematical and Analytical models of OR can be used to ar- ___________________

rive at a satisfactory solution for handling interaction and ___________________
interrelation of each sub system.
___________________
(v) Use of Computers: The models which have been developed
___________________
for the OR are complex and large; and because of this com-
___________________
plication The models developed for the use of OR are huge
and complicated. It is because of this impediment it becomes
necessary to use computers. Computers makes usage of such
problems convenient and offer results for multiple calcula-
tions.
Finding out the most optimum solution for multiple varying

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conditions is one of the key objectives of development of cer-
tain OR models.
For this reason alone it is important for the company to mea-

sure the effectiveness of the company’s operations and goals,
which can be later compared to the effectiveness of the alter-
native course of actions during the analysis.
OR Techniques
The OR has a wide array of methods and techniques available for
solving problems:
● inear Pro rammin : Linear programming can be defined

as the mathematical technique of finding the best outcome of
two linear equations or as a model to know the maximizing and
(c
minimizing the functions of various variables.
● rans ortation Pro lem: It is a distinct sort of linear pro-

gramming model . The objective of the Transportation problem
is to reduce the cost of transportation of goods as much as pos-
sible. The problem considers the product’s source origin and the
product’s destination and then comes to a conclusion.
126
● Assi nment Pro lem: This is one of the fundamental prob-
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Notes lems/models of linear programming. This model assigns dif-
___________________ ferent activities to different resources on a one-on-one basis.
___________________ In this manner, the costs are reduced and results in minimum
costs and maximum sale or profit.
___________________
___________________ ● ueuin eory: This problem or model for a mathematical

solution is for calculating the time of a queue length. The model
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___________________
for queuing theory considers the length of the queue and the
___________________ time. The order and service time need not be specified here.
___________________
● ame eory: Game theory is a fundamental decision mak-
___________________ ing a mathematical model. The model works on the principle of
___________________ finding out an outcome between two players after considering
the various rules and regulations of the game.
___________________
● n entory Control odels: Another effective cost-control

and cost-effective mathematical model, this model is used to
evaluate the perfect structure for storing of products. Inventory
control models are used to evaluate the best methods of storing
goods and products in such a manner where the costs incurred
by the company is minimum.
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● oal Pro rammin : This is a branch of or the extension on
multi-criteria decision analysis (MCDA), which is a multi-level
optimization program. The Goal Programming model is used to
solve complex problems by breaking down these complex prob-
lems to their simplest forms.
● imulation: Simulation is a procedure of using a forecast

against a real-life example and is the process of experimenting
with the given forecast or solution. This is quite risky and time
consuming.
● onlinear Pro rammin : In instances where objective func-

tions and constraints are non-linear, Nonlinear programming
comes to the rescue. Multiple factors, like bulk discounts, can
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be used to recognize the non-linearity between the objective

function and constraints.
● nte er Pro rammin : Also known as discrete program-

ming, this mathematical module requires all the variables in
the problem to be integers. This method is used to find solu-
tions for optimization and feasibility.
127
● ynamic Pro rammin : This kind of mathematical model
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considers the effect of the solution on both present and future Notes
times. The model is used to evaluate and find an outcome for ___________________
decisions which are multi-leveled. ___________________
● e uencin eory: Sequencing theory works on similar ___________________

principles as the queueing theory. The only difference is that ___________________
here, in sequencing theory, the time limits are mentioned here.
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___________________
This is useful for scheduling some service, for example, patients
waiting for their turn in a hospital, etc. ___________________
___________________
● Re lacement odels:
___________________
● arko Process: It is a process to be used in instances when
___________________
the system moves from one state to another on basis of probabil-
ity, which is known to user, and the different states have been ___________________
defined. Long-rum probability of being in a particular state is

efficiently computed through this theory.
Network Scheduling-PERT and CPM: The network schedul-

ing model helps in breaking down the various tasks for large-scale
projects. These models break down the work down to the individu-
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al task, which helps in time-saving. The network scheduling mod-
el works well for planning, scheduling and monitoring projects in
the areas such as computer system installations, development, and
designing, construction field, etc.. The program (or project) evalua-
tion and review technique, commonly abbreviated PERT, is a sta-
tistical tool, used in project management, to analyse and represent
the tasks involved in completing a given project. The critical path
method (CPM) is a step-by-step project management technique for
process planning that defines critical and non-critical tasks with the
objective to prevent time-frame problems and process bottlenecks
● ym olic o ic: The model substitutes various things with

symbols or other variables. These study of various mathe-
matical statements or symbols and deriving its meaning is
known as symbolic logic. Additionally, this is also called for-
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mal logic.
● nformation eory: This model applies to evaluating the

encoded electrical transmissions and also provides a statisti-
cal representation of the evaluation. This improves the com-
munication flow in the OR.
128
Phases of OR Study
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Notes
___________________ Operation Research is a blend of mathematics and science. The

model makes use of extensive mathematical properties to evaluate
___________________
complex problems and to give a rational solution. Following are the
___________________ various steps mandatory for analysing a problem under OR:
___________________
Step I. Observe the Problem Environment
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___________________
The initial step involves collecting information regarding the environ-
___________________ ment where the problem exists. Post understanding the environment,
___________________ activities such as meetings, explanations, investigations etc. After
the observation of the environment, activities such as conferences,
___________________
observations, research, etc. aid in understanding the problem better.
___________________
te nal se an efine the o le
___________________
This step concentrates on understanding the problem and under-
standing its intensity by taking the objectives and the limitation
of it into consideration. This step revolves around only finding the
problem, finding the solution comes after this step.
Step III. Develop a Model

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The third step concentrates on developing a model. This model will
represent the real or the abstract OR model of the systems, the en-
vironment in the form of equations, relationships, etc. The activities
in the model will define the interrelationship between the variable
and the model could be tested and then modified to work for a spe-
cific environment. It can also be modified if the model does not give
satisfactory results.
Step IV. Selection of Data Input

Results of OR models cannot be relied unless the data is genuine
and relevant. Therefore, it is crucial to get the correct information.
Under this step analysis of internal and external data and computer
data banks for data collection are used with an objective to procure
pertinent and adequate inputs for operation and testing of the OR
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model.
Step V. Solution and Testing

This step entails the finding of a solution and the testing of the said
solution with the help of the OR model. The solution is not imple-
mented for the real problem. First, it is tested with the model to find
out of its limitations, if it has any. Furthermore, if there are any
129
limitations to the solution or the model does not behave as it should,
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modifications and changes are made or considered. To get the de- Notes
sired results and to support the objectives of the organization is the ___________________
driving factor for this step. ___________________
Step VI. Implementation of the Solution ___________________
This is the final stage of the OR study. With OR models, the decision ___________________
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making is a scientific implementation of well-thought and rational ___________________
solution. The model’s behavioural irregularities are fixed and elim-
___________________
inated, and the authority of the organization must resolve all the
issues regarding the workers, supervisors and other things to avoid ___________________
conflicts. The management and the OR scientist should work in ___________________

total harmony to get the best results of the OR model. A well-imple-
___________________
mented OR model will give rise to good working conditions and will
win the support of the management. ___________________
The White Manufacturing company is well known for production of

power brake’s spring-loaded replacement spikes. These brakes are
then packaged into separate inner cartons(owing to their small size),
which are then packed into large master carton (24 pcs) for ease of
shipment on the third level of a multi-storeyed building. Thereaf-
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ter, the packed cartons are placed on conveyor belts and sent to the
second level through an elevator. There the packages are sorted ac-
cording to shipment orders and after the sorting has been done, the
packages are again placed on a semi-live skid and send to the first
level through an elevator. On the first level, the packages are stored
as per their shipping schedule. How is it possible to upgrade the
package movement, while disregarding the labour requirements?
The R-way distributing company handles order ranging from a sin-
gle item to up to a hundred items with sizes varying from 3 × 4 ×
6 to 3 × 3 × 3 . Commercial transporters are used for shipment of
packed cartons. Packaging is handled by two workers on a flat waist-
high work benches because of the size of the cartons. Accessories
such as rope, strapping, gummed tape are used to secure the pack-
age. Only manual labor is used to ensure that the shipment has been
properly packed and sealed. Thereafter it is sent to clearly marked
(c
shipping bins placed about 40 yards from the wrapping tables.
Application of OR
Developing over the past few decades, the operational research mod-
el makes used of mathematical techniques to improve the process
of decision making in businesses. This model helps the manage-
130
ment by providing tools to optimize the business and offers the best
S
Notes solutions for the many decisions to be made by the managers in
___________________ the organizations during their daily business activities, planning
___________________ for something or for their strategic planning. Here are some types
of OR applications which show how these techniques are used today:
___________________
___________________ Accounting
PE
___________________ ● Analysis of credit policy
___________________ ● Planning the cash flow

___________________ ● Standard Costs Development
___________________ ● By-products cost development
___________________
● Accounting strategy planning
___________________
Construction
● Scheduling, monitoring, and controlling of project
● Workforce analysis
● Workforce deployment
● Project resource allocation

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Facilities Planning
● Decision regarding factory location and size
● Estimation requirement of facilities
● Hospital planning
● Designing a global standard logistic system
● Loading, unloading and Transportation
● Decision on warehouse location
Finance
● Development of models for cash management
(c
● Capital Allocation
● Devlopment of models for financial planning
● Analysing Investments
● Analysis of Portfolio
● Policy development for dividends

131
Manufacturing
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Notes
● Inventory management
___________________
● Projection of marketing balance
___________________
● Scheduling production ___________________
● Smoothing Production ___________________
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Marketing ___________________
● Allocation of advertising budget ___________________
___________________
● Timing product introduction
___________________
● Product mix selection
___________________
● Analysing packaging alternatives
___________________
Organizational Behaviour / Human Resources
● Personnel planning
● Employees recruitment
● Balancing skills
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● Scheduling Training Programs
● Effective organisational planning
Purchasing
● Ideal buying
● Best reordering
● Transferring Materials
● Research and development:
o Projects control
o Budget allocation
o Product introduction planning

(c
Limitation of OR
OR is widely used and offers many applications. However, the model
also has a number of drawbacks which are mainly present due to
the fact that the model building involves a lot of money, time and
the problems related to building the structure of the model. Some of
them are as given below:
132
(i) The distance between O.R. Specialist and Manager: The
S
Notes job of an OR researcher requires the person to be an expert
___________________ mathematician as well as a good statistician, who has knowl-
___________________ edge of complex workings of the model and the mathematical
problems involved in the model. Although experienced and ex-
___________________
pert in their field of study, the study of an OR does not follow
___________________ or entail the study of business management. The OR specialist
PE
___________________ is not trained like a manager is and does not have knowledge
of the business and its functions. On the same note, a manager
___________________
is trained from a business point of view and may find it hard
___________________ to understand the complex mathematical solutions the OR spe-
___________________ cialist comes up with. There is a large distance between the
manager and the OR researcher.
___________________
___________________ (ii) Magnitude of Calculations: OR model is developed with

an aim to find rational solutions after evaluation and consid-
eration of pertinent factors to the problem. In present times,
there are too many such factory and in order to express them as
models and In this modern world, these factors are many and
to express them in terms of the model and to create relation-
ships between them, a machine will be required.
)U
(iii) Money and Time Costs: A lot of changes could occur in the
information regarding the model and it is costly to incorporate
them in models. In such situations seeking the perfect situation
is not recommended, going for a workable solution is the better
option.
i on- uantifia le actors: OR models are used for rational

thinking and decision making. These models make use of quan-
titative methods and do not understand feelings, emotions or
other qualitative factors.
(v) Implementation: The decision or solution to the problem

should be implemented with care. This is a delicate task and
must consider the various complexities of the human behavior
and relations.
(c
Summary
OR has been used with great success in various operations in almost
all fields such as military, army, business, government, industries
etc. OR is a useful tool and offers many applications and provides
tools from the fields of economics, engineering, statistics, mathe-
133
matics, etc. The OR tool includes linear programming, dynamic pro-
S
gramming, game theory, queuing problem, etc. Notes
___________________
Although the OR model has many uses and applications, there are
many drawbacks to the model, mainly due to the excessive time and ___________________
money are involved in the building process. OR is used in most of ___________________

the areas of a business to assist with decision making as it not only
___________________
improves the quality of decisions but also enhances the effectiveness
PE
___________________
of managers.
___________________
1. What is OR and how is it relevant in day-to-day life? ___________________
2. What are the various techniques of OR? ___________________
___________________
3. Explain in detail, at least two applications of OR.
4. What are the phases of Operational Study research?
5. What are the key limitations of OR?

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(c
(c
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PE
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135
Unit 19
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Notes
Linear Programming
___________________
___________________
___________________
Objectives:
___________________
After completion of this unit, you will be able to :
PE
___________________
\l Explain linear programming?
\l Solve a basic 2-decision variables problem which requires maximiza- ___________________
tion
___________________
\l Apply graphical approach to solve a 2-decision variable inequality to
arrive at an optimal solution ___________________
___________________
Introduction
___________________
One of the most commonly used decision-making tools is Linear Pro-

gramming. It is applicable to various maximization and minimiza-
tion problems where we are dealing with constraints.
The method involves two steps:

● Conversion of a problem into a mathematical model
)U
● Finding out the problem’s best solution
To understand the details of linear programming an example is

greatly helpful.
Consider the following situation: A manufacturer of medicines

can produce tablets and capsules. The profit is Rs 5 and Rs 3 per
tablet and capsule respectively. Three chemicals are used for pro-
duction –x, y, and z. the quantities of chemicals used in one batch of
the tablet is 4, 5 and 10 respectively and for one batch of capsule it
is 8 of x and 3 of y.
The quantity of chemicals available with the manufacturer is 400 of

x, 300 of y and 300 of z. How much of capsules and tablets should be
produced to maximize profit?
(c
Let us try to tabulate the data first

a le : Profits of a lets and Ca sules Usin C emicals and Ca aci-
ty of 3 Chemicals
Chemical x Chemical y Chemical z Profit

Tablet 4 5 10 5
Capsule 8 3 0 3
Available capacity 400 300 300
136
Now, let us convert it to a linear programming problem.
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Notes
Profit maximization is the objective
___________________
___________________ Profit will be 5T + 3C
___________________ The objective function is therefore

___________________ Maximize 5T + 3C
PE
___________________
Because of quantity constraint of chemical x,
___________________
4T + 8C 400
___________________
Similarly
___________________
___________________
5T + 3C 300
___________________ 10T 600
So the linear programming problem becomes
Maximize 5T + 3C
Subject to:
4T + 8C 400
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5T + 3C 300
10T 300
Now for the next step, we need to find the optimal solution for the
problem. The steps involved are:
● Convert inequalities into equalities
● Plot the equalities on a graph
● Find the feasible area for the solution on the graph which sat-
isfies all constraints
Let us try to plot the equations on a graph.
4T + 8C = 400
(c
Placing T as zero, C = 50
Placing C as zero, T = 100
So we get two coordinates (100, 0) and (0, 50)
Plot the equation and find a feasible area for the constraint
Unit 19: Linear Programming
137
S
100 Notes
90
___________________
80
70 ___________________
60
___________________
50
40 ___________________
30
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20 ___________________
10
___________________
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 ___________________
___________________
Figure 19.1: Using Values of Table19.1
___________________
___________________
5T + 3C = 300
Placing T as zero, C = 100
Placing C as zero, T = 60
So, we get two coordinates (60, 0) and (0, 100)

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Plot the equation and find a feasible area for the constraint.
100
90
80
70
60
50
40
30
20
10
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150

(c
10T = 300
Or T = 30
Plot the equation and find a feasible area for the constraint.
138
S
Notes 100
90
___________________
80
___________________ 70
60
___________________
50
___________________ 40
30
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___________________ 20
10
___________________
___________________ 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150
___________________
___________________
___________________
Now, find the feasible area satisfying all constraints.
100
90
80
70
60
50
)U
40
30
20
10
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150
Figure 19.4: Using Values of Table19.1Satisfying All Constraints
The optimal solution lies at the corners of the feasible area.
There are 4 corners in the feasible area
(0, 0)
(30, 0)
(0, 50)
(c
And intersection of
4T + 8C = 400
5T + 3C = 300
Solving the equations, the coordinates are (43, 28)

Unit 19: Linear Programming
139
Calculating profit at all points
S
Notes
Coordinates Profits C
___________________
(0, 0) 0
(30, 0) 150 ___________________
(0, 50) 150
___________________
(43, 28) 2
___________________
So, for maximization of profit it is necessary to produce 43 batches of
PE
___________________
tablets and 28 batches of capsules.
___________________
Thus, it can be analysed that to create an OR model to solve a prac-
___________________
tical problem for maximization of profits, linear programming tech-
niques are of a great help to the managers. ___________________
___________________
Summary
___________________
Linear programming is a method of obtaining the best possible out-
come in a mathematical model. Linear programming is used to solve
problems related to various fields of study. It has great usage in
the fields of business, mathematics, economics and engineering. The
various industries that make use of linear programming models are
energy, transportation, telecommunications, and manufacturing.
)U
Problems related to planning, scheduling, assignment, and design
can also be effectively solved with help of linear programming.
Review Questions
P and Q are two products made by a company using two machines
X and Y. Following is the processing time required for production of
each product on a machine: -
P – Machine – 50 minutes and
Machine – 30 minutes
Q – Machine – 24 minutes and
Machine – 33 minutes
(c
Available Stocks – P – 30 units Q – 0 units
Available Processing Time – – 40 hours and – 35 hours
Current Demand – P – 75 units and Q – 5 units
Company Goal – To Produce Maximum combined units of P Q by

end of the week.
140
1. How much of each product to be made in the current week as a
S
Notes
linear program?
___________________
2. Solve this linear program graphically.
___________________
If company’s policy is to maximize the profits by the end of the week,
___________________
calculate the optimal quantities of P and Q that the company should
___________________ produce if the profits per unit of products P and Q are Rs.100 and
PE
___________________ Rs.85 respectively.
___________________ 3. Formulate the problem of deciding how much of each product

___________________ to make in the current week as a linear program?
___________________ 4. Solve this linear program graphically

___________________
___________________
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(c
141
Unit 20
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Notes
Case Study: On Road to Achieve

___________________
___________________
Optimal Production: Gys ___________________
Chemicals ___________________
PE
___________________
A chemical based company, GYS limited, which is owned by
___________________
the South African government, primarily manufactures 2
products, potassium sulfate and sulphuric acid. Each of the ___________________
product passes through three different processes: ___________________
● Reaction ___________________
___________________
● Filtration
● Evaporation
Potassium sulfate, also known as, sulfate of potash or Ar-

canite, is a non-flammable white crystalline salt which is sol-
uble in water. It is primarily used in the fertilizer industry,
as it provides both potassium and sulfur, and it doesn’t con-
)U
tain chloride, that’s harmful to some crops. Crops that are
less sensitive require potassium sulfate for optimal growth
if the soil accumulates chloride due to chlorine presence in
irrigation water.
The chemical sulphuric acid is used as a raw material in the

production of potassium sulfate. It is a medium to produce
phosphates, car batteries, pulp, and paper, etc. A data collec-
tions company that manufactured 51.7 tons of sulphuric acid
a day produced only 40.8 tons of potassium sulfate per day.
The major issue faced by the company is the demand for the
per annum demand for potassium sulfate is 6,500 tons, and
the demand for sulphuric acid per annum is 5,200. But the
availability of machine hours on 3 processes was also con-
straining manufacturing of the products as given below:
(c
Contd.
142
S
Machine hours on
Notes
Demand
___________________ in tonnes/
Products Reaction Filtration Evaporation annum
___________________
Potassium
___________________ Sulphate (40
tons per day) 18 8 14 6500
___________________ Sulphuric Acid
(produce 51.7
PE
___________________ tons)per annum
for sulphuric
___________________ acid24 24 24 24 5200
___________________ Total available
time (assuming
___________________ 300 working
days/year) 7200 7200 7200
___________________
___________________ The total cost prices and the selling price of the two chemi-
cals, potassium sulfate, and sulphuric acid are given below
as per the productions and the sales department. The ob-
jective is to find out how many tons of both the chemicals
should be produced in a day to maximize the daily profits of
the company while considering that the company works for
an average of 300 days in a year.
)U
Price in ZAR per ton Potassium sulphate Sulphuric Acid
Production / Cost price 5240 5800
Selling price 245 10350
(c
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BLOCK–V
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Detailed Contents
S
UNIT 21: TRANSPORTATION MODEL ll Types of Games
ll Introduction ll Pure Strategies: Game with Saddle Point
ll Setting Up a Transportation Problem ll Dominance Property
ll Mathematical Model of a Transportation Problem ll Summary
ll Initial Solution – Northwest Corner Rule ll Review Questions
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ll Optimality Test – the Stepping Stone Method
UNIT 24: SIMULATION
ll Summary
ll Introduction
ll Review Questions
ll Why Simulation
UNIT 22: ASSIGNMENT MODEL ll Monte Carlo Method

ll Introduction ll Summary
ll Review Questions
UNIT 25: CASE STUDY: SM TEXTILES – DECODING
TRANSPORTATION MODEL
UNIT 23: GAME THEORY
ll Basic Assumptions
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145
Unit 21
S
Notes
Transportation Model
___________________
___________________
___________________
Objectives:
___________________
After completion of this unit, the learners will be able to:
PE
___________________
\l Define Transportation Problem
\l Apply a Mathematical Model of Transportation Problem ___________________
\l Describe the Initial Solution – North West Corner Rule ___________________

\l Outline the optimal Test – Stepping Stone Method
___________________
___________________
Introduction
___________________
A transportation model is type of linear programming that is as-
sociated with shipment of goods from source to destination. This
model is used to find out the optimum and cost-efficient strategy for
transporting goods from supply centres such as factories to various
receiving centres like warehouses. Each source can supply a fixed
units or products as per its capacity and each destination has a fixed
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requirement.
Setting Up a Transportation Problem

Here are a few examples explaining the setting up of transportation
problem.
Example 21.1– A raw materials company transports raw materi-

als from three plants, 1, 2 and 3, to three manufacturing sites, A,
B, and C.
The plants can supply the following number of material in tons per
week:
Table 21.1: Setup of Transportation Problem in Supply Plant

(c
Plant Supply (capacity)

1 300
2 300
3 100
The requirements of the sites, in a number of tons per week, are:

146
Table 21.2: Setup of Transportation Problem in Demand Site
S
Notes
Manufacturing Site Demand (Requirement)
___________________
A 200
___________________ B 200
C 300
___________________
___________________ The cost of transporting 1 ton of raw material from each plant to
each site is shown in the table below. In this table, each row rep-
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___________________
resents a source, and each column represents a destination.
___________________
Table 21.3: Cost and Requirements Table
___________________
Supply
___________________ From To A B C Availability
1 4 3 8 300
___________________
2 7 5 9 300
___________________ 3 4 5 5 100
Demand Requirement 200 200 300 700
Mathematical Model of a Transportation Problem

Notation given below are used to define the transportation prob-
lem and thereafter it can be formulated into a linear programming
)U
problem.
Consider the following notation:
Xij = the number of units to be distributed from source i to destina-

tion j
(Where i = 1, 2….,m; j = 1,2,….,n)
Si = Supply from source i
Dj = Demand from destination j
Cij = cost per unit distributed from source i to destination j
The delivery expenses of the goods from the starting point to end
point , i.e., “I” to “j” is directly proportional to the number of com-
modities distributed. Let Z be total distribution costs from all the ‘m’
(c
sources to the ‘n’ destinations. We also assume that the total supply
= total demand.
In mathematical form, this is expressed as;
m si = n di
i=1 j=1
Unit 21: Transportation Model
147
This is called a balanced problem. When a problem is balanced, all
S
the products that can be supplied are used to meet the demand. Notes
___________________
The formulation of this problem as a linear programming problem
is presented as, ___________________
___________________
Minimize Z = m n cij * xij
i=1 j=1
___________________
Subject to the below Constraints
PE
___________________
n xij = si, for i = 1, 2…., m ___________________

j=1
___________________
n xij = dj, for j =1, 2…, n
j=1 ___________________
Xij ≥ 0, for all i and j ___________________
___________________
Initial Solution – Northwest Corner Rule
North-west corner rule can be used to find out the first feasible solu-
tion of the problem.
In the Northwest Corner Rule, one moves methodically from the top
left-hand corner of the table to the bottom right-hand corner by ei-
)U
ther going along the column or the row. Here are the steps:
1. Select the most “North-west” (corner) cell of the table
2. Maximum amount should be allocated to that cell based on the

requirement and capacity restraints.
3. Each row’s capacity must be fully utilised before going down to

another row.
4. Each row’s requirement must be exhausted prior to moving

right to another column.
5. Later, look again to ensure that the model’s capacity and other
requirements have been met.
(c
Let us consider an example in which a company manufactures office

furniture at three locations: D, E and F. The firm distributes the
furniture through regional warehouses located in A, B and C as per
the below figure 21.1:
148
Factories
S
Warehouses
Notes (Sources) (Destinations)
___________________ 100 Units D A 300 Units
___________________
300 Units E B 200 Units
___________________
___________________
300 Units F C 200 Units
PE
___________________
___________________ Capacities Shipping Routes Requirements
Figure 21.1: Network Format Diagram

___________________
___________________
As per assumptions, the production costs for every furniture manu-
facturing company is identical. The only significant difference in the
___________________
various shipping costs for the manufacturers. The costs are shown
___________________ in the table below:
Transportation Costs per Furniture
From To A B C
D 5 4 3
E 8 4 3
F 9 7 5
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We proceed with constructing a transportation table and labelling
its different components like in the table below. Now, Northwest
corner rule can be used to find a feasible solution to the problem
initially. We start in the upper left-hand cell and allocate units to
shipping routes as follows:
Table 21.4: Transportation Table for the Delivery of Furniture
To
From A B C Capacity
D 5 4 3
100
E 8 4 3
300
F 9 7 5
300
Requirements 300 200 200 700
(c
Steps Using the Northwest Corner Rule

1. Exhausting the supply (factory capacity) of each row before
moving down to the next row.
2. Exhaust the demand (warehouse) requirements of each column
before moving to the next column to the right.
149
3. Check that all supply and demand requirements are met. The
S
initial shipping assignments are given in the table below. Notes
Table 21.5: Initial Solution of the NorthWest Corner Rule ___________________
To ___________________
From A B C Capacity ___________________

D 100 100
___________________
E 200 100 300
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F 100 200 300 ___________________
___________________
Table 21.6: Calculation of Costs of Initial Shipping Assignments
___________________
Units Per Unit Total
___________________
From To Shipped Cost(Rs) Cost(Rs)
D A 100 5 500 ___________________
E A 200 8 1600 ___________________
E B 100 4 400
F B 100 7 700
F C 200 5 1000
Total 4200
Therefore, the initial feasible solution for this problem is Rs. 4,200.
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Now that the initial feasible solution has been found, its time to find
out if it is the optimum solution as well.
Optimality Test – the Stepping Stone Method

After the initial feasible solution has been found, the next step in-
volves determining if that solution is the most optimal solution.
The procedure for finding the optimum solution using the Stepping
Stone Method is as follows:
1. Choose an unused square for evaluation.
2. Starting from this square, trace a closed path back to the origi-
nal square through only that squares that have been used ear-
lier (only horizontal or vertical moves allowed). Directions can
be changed only at occupied cells.
(c
3. Starting with a plus (+) sign at the idle square, place an alter-
nate minus and plus signs on each corner square of the closed
path that was just traced.
4. Calculate an improvement index, Iij by adding together the

unit cost figures in each square with a plus sign and then sub-
tracting the unit figures in each square with a minus sign.
150
5. Steps 1 to 4 have to be repeated until an improvement index
S
Notes has been calculated for all unused squares.
___________________
Result –
___________________
l An optimal solution is said to have reached when all indices
___________________
computed are zero or greater than zero.
___________________
l If this is not the case, then it is more likely to minimise the
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___________________ total shipping costs.
___________________ l To check the optimality criterion, it is important that the cost
___________________ value index values for the currently unoccupied cells be non-
negative. This will prove the current situation as optimal.
___________________
l The solution should be improved further if there are negative
___________________
values. For the improvement, an allocation is made to an empty
___________________
cell and the subsequent changes in the demand and supply are
made.
To evaluate the working of the Stepping Stone Method, the steps

are applied an example of manufacturing furniture and evaluate
the shipping routes.
Steps 1–3: Beginning with the D-B route, we first trace a closed path
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using only currently occupied a square and then place alternate plus
signs and minus signs in the corners of this path.
Step 4: An improvement index Iij for the D-B route in now comput-
ed by adding unit costs in squares with plus signs and subtracting
costs in squares with minus signs. Thus
IDB = +4 – 5 + 8 – 4 = +3
Table 21.7: Evaluating D-B Route
To
From A B C Capacity
D 5 Start 4 3
100 – ← + 100
E 8 ↑ 4 3
↓
(c
200 + → –100 300

F 9 7 5
100 200 300
Step 5: Next we consider the D-C unused route

151
+DC – DA +EA –EB + FB –FC
S
Notes
The D-C improvement index is, IDC = +3 – 5+8 – 4+7 – 5 = +4
___________________
Table 21.8: Evaluating D-C route
___________________
To
___________________
From A B C Capacity
___________________
D 5 4 Start 3
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100 – ← ← ← ← + 100 ___________________
E ↓ 8 4 ↑ 3
___________________
200 + → –100 ↑ 300
F 9 ↓ 7 ↑ 5 ___________________
+ → → – ___________________
100 200 300
___________________
___________________
Since the improvement index for D-C route is +4; it cannot be the
optimal solution. Similarly, calculating EC and FA route
EC route: +1
F-A route: – 2
Since IFA index is negative, a cost reduction may be attained by mak-

)U
ing use of F-A route. You must know here that you can further make
use of the Stepping Stone path for the evaluation of
Table 21.9: Stepping Stone Path Used to Evaluate the FA Path
To
From A B C Capacity
D 5 4 3
100 100
E 8 4 3
200 + ← + 100 300
F ↓ 9 ↑ 7 5
Start + → – 100 200 300
As the improvement index for the F-A route is negative, the number
of allowed units are transported on this route referring to the closed
(c
path of plus signs and minus signs drawn for the route. For a new
solution, the same number is added to all the squares on the closed
path which have a plus sign and is subtracted from all the squares
which show a minus sign. Other squares remain same. Here is how
the new solution will look:
152
Table 21.10: Calculation of Cost Using the Improved Solution
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Notes
To
___________________
From A B C Capacity
___________________ D 5 4 3
___________________ 100 100
E 8 4 3
___________________
100 200 300
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___________________ F 9 7 5
100 200 300
___________________
___________________
___________________
The shipping cost for this new solution is 100 × 5 + 100 × 8 + 200
× 4 + 100 × 9 + 200 × 4 = RS. 4,000. The shipping cost for this new
___________________
solution is Rs. 4,000
___________________
The above steps are repeated to check if the above solution is opti-
mal. We see that Index for E-C route is, Rs.1. Hence, an improve-
ment can be made by shipping the maximum allowable number of
units from E to C in the below table.
Table 21.11: Path to Evaluate the E-C Route
To
)U
From A B C Capacity
D 5 4 3
100 100
E – 8 ← ← 4 ← + 3
100 ↓ 200 Start 300
F ↓ 9 7 ↑ 5
100 + → → → → → – 200 300
The total cost of the third solution is:
100 × 5 + 200 × 4 + 100 × 3 + 200 × 9 + 100 × 5 = Rs. 3,900
To determine if the current solution is optimal, we calculate the im-

provement indices. Each route is evaluated again, and we conclude
that the above is an optimal solution because each improvement
(c
index is greater than or equal to zero.
Summary
The transportation problem looks into the allocation of sources and
jobs to destinations and machines. It is useful for many problems
that require effective utilization of resources. It is used in manu-
153
facturing to determine how to assign labor and machinery to reduce
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the cost of operations. It is also applicable in high-level business Notes
operations in order to maximize profit. It could also apply to logis- ___________________

tics, to decide how resources can be applied to get work done in the ___________________
minimum amount of time.
___________________
PE
___________________
1. What is transportation problem?
___________________
2. Assume that there is a company that carries out production at
three facilities and then ships them to three warehouses. Pre- ___________________
pare a network representation of the transportation problem ___________________

for the same on the basis of the following table which shows the
___________________
plant capacities and warehouse demands.
___________________
Plant Capacity
Plant Warehouse (No. of Units)
W1 W2 W3
P1 22 18 26 350
P2 12 12 10 450
P3 14 20 10 200
Warehouse 250 450 300
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Demand (No.
of Units)
3. In order to supply electricity to three cities there are three pow-

er plants in a city that have power generation capacity of 40,
30 and 25 million kWh. These cities have respective demand of
40, 35 and 20 million KWH. The following table gives the cost
of distribution (in Thousands Rs.) for these cities in terms of per
million unit:
City
Plant 1 2 3
1 30 75 45
2 35 35 40
3 55 50 45
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(a) Formulate the transportation model
(b) Find the initial solution using Northwest corner method
(c) Find the optimum solution using Stepping Stone Method
4. A company has factories at A, B and C which supply to ware-

houses at D, E and F. Daily factory capacities are 200, 160
154
and 90 units respectively. Daily warehouse requirements (de-
S
Notes mands) are 180, 120 and 150 units respectively. Determine the
___________________ optimum distribution for this company to minimize shipping
___________________ costs. Unit shipping costs are as follows:
___________________ Factory D E F Capacity

A 16 20 12 200
___________________
B 14 8 18 160
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___________________ C 26 24 16 90
Demand 180 120 150 450
___________________
___________________
___________________
___________________
___________________
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155
Unit 22
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Notes
Assignment Model
___________________
___________________
___________________
Objectives: ___________________
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After completion of this unit, you will be able to explain the following: ___________________
\l What is Assignment Model as an Operational Research Tool?
___________________
\l How can Assignment Model Assist the Managers to Distribute the
Tasks Effectively? ___________________
___________________
Introduction ___________________
An assignment problem seeks to minimalize the overall cost assign- ___________________

ment of “m” workers to “m” jobs, given that the cost of worker “ per-
forming job “j” is cij. Below are the key points which should be noted:
l It is assumed that all the workers have been assigned, and each
job has been performed.
l Assignment problems may be solved as linear programs because

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an assignment problem is a special case of a transportation
problem in which all supplies and all demands are equal to 1.
Example 22.1: Let there be four workers A, B, C and D and 4 jobs W,

X, Y, and Z. the time taken by each worker on each job is as below:
Table 22.1: Information based on Example 22.1
W X Y Z
A 15 13 14 17
B 11 12 15 13
C 13 12 10 11
D 15 17 14 16
Allocate the jobs, so the time consumed by all the 4 workers is less.
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Step 1: Subtract the smallest value of all columns from each element
of columns
Table 22.2: Step 1 in Allocation of Work
W X Y Z
A 4 1 4 6
156
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B 0 0 5 2
Notes
C 2 0 0 0
___________________
D 4 5 4 5
___________________
___________________ Step 2: Subtract the smallest value of all rows from each element of row
___________________ Table 22.3: Step 2 in Allocation of Work
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___________________ W X Y Z
___________________
A 3 0 3 5
___________________
B 0 0 5 2
___________________
C 2 0 0 0
___________________
___________________ D 0 1 0 1
Step 3: Cover all zeroes with a minimum number of lines
W X Y Z
A 3 0 3 5
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B 0 0 5 2
C 2 0 0 0
D 0 1 0 1
Since 4 lines were used, so it is the optimal solution. There are four
lines because there were four workers.
W X Y Z
A 3 0 3 5
B 0 0 5 2
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C 2 0 0 0
D 0 1 0 1
Thus, we can see that assignment solution can be effectively used to

distribute the jobs among different people to minimize the efforts /
total time spent.
Unit 22: Assignment Model
157
Summary
S
Notes
An assignment model is a statistical tool that is a part of trans- ___________________
portation method and assists with elimination of classic assignment
___________________
problems such as allocation of employees to machines or machines to
jobs or employees to jobs. Number or employees has to be provided ___________________
along with an indication if the problem relates to maximization or ___________________

minimization in order to generate one.
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___________________
Assignment problem is applicable in various fields, such as assign- ___________________
ing machines to factory orders, assigning sales and marketing peo-
___________________
ple to sales territories, contracts to bidders by proper bid evaluation,
teachers to classes, accountants to accounts of the clients, and police ___________________
vehicles to patrol areas. ___________________
___________________
Review Questions
Case I
A works manager has to allocate four different jobs to four work-
men. Depending on the efficiency and the capacity of the individual,
the time taken by each differ as shown in the table. Hows should
the tasks be assigned to all the workers to minimize the total man-
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hours?
Job Workers
A B C D
1 10 20 18 14
2 15 25 9 25
3 30 19 17 12
4 19 24 20 10
1. Formulate the problem of deciding what job should be assigned

to each worker.
2. Solve the problem using Assignment Model and find out a way
of assigning the workers so as to reduce the total number of
man-hours.
(c
Case II
A production manager must allocate three different jobs to three la-
bors. Depending on the efficiency and the capacity of the individual
the time taken by each differas shown in the table. How should the
tasks be assigned to the 3 labours to minimize the total man-hours?
158
S
Job Workers
Notes
A B C
___________________ 1 17 27 33
2 47 35 43
___________________
3 46 44 44
___________________
3. Formulate the problem of deciding what job should be assigned
___________________
to each labor.
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___________________
4. Solve this using assignment model to find out how the tasks
___________________
should be assigned to all the workers so as to minimize the total
___________________ man-hours.
___________________
___________________
___________________
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159
Unit 23
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Notes
Game Theory
___________________
___________________
___________________
Objectives:
___________________
After completion of this unit, learners will be able to:
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___________________
\l Explain the game theory?
\l Define how game theory is used to achieve an optimal solution for in- ___________________
volved players?
___________________
\l Apply pure game with saddle point – Implementing minimax and max-
imin strategies. ___________________
\l Apply Game without any saddle point – Learning mixed strategy. How ___________________
to solve for an optimal solution using probabilities?
___________________
\l Define Dominance Property – Solving games which involve more than
2 strategies for both the players.
The term “game” means a conflict between two or more individuals

or groups or organizations. The key objective of Game Theory is to
determine and formulate the rules of rational behavior in situations
where the outcome doesn’t only depend from the decision made by
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one individual but also depends on the actions taken by other inter-
ested individuals.
Basic Assumptions
There are few basic assumptions which are considered in game the-
ory:
l The players act rationally and intelligently.
l The players attempt to maximize gains and minimize losses.
l The players make discrete decisions without direct communi-

cation.
l The players concurrently choose their individual course of ac-

tion.
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l The payoff is fixed in advance.
Types of Games
There are several types of games under this, primary being:
160
Two-person games and n-person games
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l
Notes
l Zero-sum and non-zero sum games
___________________
___________________ l Games of perfect information and imperfect information
___________________ l Games with a finite number of moves

___________________ l Cooperative and non-cooperative games
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___________________
l 2 × 2 two-person games, 2 × m, and m × 2 games
___________________
l 3 × 3 and larger games
___________________
l Constant sum games
___________________
After getting introduced to the different types of games, now it is
___________________
important to discuss the concept of Pure Strategies.
___________________
Pure Strategies: Game with Saddle Point

A pure strategy determines all your moves during the game (and
should, therefore, specify your moves for all possible other players’
moves).
For this category, the target is to determine that in order to op-

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timize the pay-off, how will the players select their approaches or
tactics for the game. Minimax and Maximin principles are used by
the theory of this game. In the pay-off matrix, player A chooses a
strategy in such a way that he receives maximum benefit over the
rows of minimum gain. This strategy is called Maximin Principle.
In the same way, the loss of player B is indicated in each column of
B’s loss. In this case, the player will choose a strategy in which his
loss is minimum. This strategy is called Minimax Principle. If the
maximin value is equal to the minimax value, the equilibrium is
achieved, which is named as “saddle point”. This suggests the opti-
mal strategy for player A and B.
Example 1: Consider the example to solve the game whose pay-off

matrix is given in Table 23.1 as follows:
Palyer B
(c
1 2
1⎛1 3⎞
Player A
2⎜
⎝−1 6⎟
⎠
Figure 23.1: Game Problem
To solve the game, we will use minimax procedure. Find the small-
Unit 23: Game Theory
161
est value in each row and select the larger of those 2. Then, find the
S
largest value in each column and select the smaller of those 2. Notes
Palyer B ___________________
1 2 Row Min ___________________

1 ⎛1 3⎞ 1 1 ___________________
Player A → ⎜
2 ⎝−1 6⎟
⎠−1 −1
___________________
Col Max → 1 6
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Figure 23.2: Pay-off Matrix ___________________
___________________
If maximum value in row is equal to the minimum value in column,
then saddle point exists. ___________________
Max Min = Min Max ___________________
___________________
1=1
___________________
Therefore, there is a saddle point.
The optimal strategies are:
Player A, plays Strategy A1, (A A1).
Player B, plays Strategy B1, (B B1).
Value of game = 1.
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Example 2: Solve the game with the pay-off matrix as given in Fig-
ure 23.3.
Player B
B1 B2 B3
A1 ⎛ −4 0 4⎞
Player A A2 ⎜ 1 4 2⎟
⎜ ⎟
A3 ⎝ −1 5 −3⎠
Solution: Find the smallest element in rows and largest elements

in columns as shown in below Figure 23.4
Player B
B1 B2 B3 Row min
Player A −4 0 4 −4
(c
A1
A2 1 4 2 1
A3 −1 5 −3 −3
→
Column Max 1 5 4
→
Figure 23.4: Minimax-Maximin Procedure
162
Select the largest element in row and smallest element in column.
S
Notes
Check for the minimax criterion
___________________
Max Min = Min Max
___________________
1=1
___________________
Therefore, there is a saddle point of the minimax maximin situation
___________________
is the payoff that is simultaneously a row minimum and a column
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___________________ maximum. Such a situation is a pure strategy. A pure strategy is
___________________ one that is used by a paler at each round of the game to win each
round of the game.
___________________
Optimum Strategy:
___________________
___________________
Player A A2 Strategy
___________________ Player B B1 Strategy
The value of the game is 1.
Mixed Strategies: Games without Saddle Point

For any given payoff matrix without saddle point, the optimum
mixed strategies are shown in Figure 23.5.
Player B
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B1 B2
A1 ⎛ a11 a12 ⎞
Player A
A2 ⎜⎝ a21 a22 ⎟⎠
Figure 23.5: Mixed Strategies
Let p1 and p2 be the probability for Player A.
Let q1 and q2 be the probability for Player B.
Let the optimal strategy be SA for player A and SB for player B.
Then the optimal strategies are given in Figure 23.6 a and b.

⎛ A1 A2 ⎞ ⎛B B2 ⎞
(a ) S A = ⎜ ⎟ and ( b ) SB = ⎜ 1
⎝ p1 p2 ⎠ ⎝ q1 q2 ⎟⎠
Figure 23.6: (a), (b): Optimum Strategies
(c
The formula for determination of p1 and p2:

a22 − a21
p1 = and p2 = 1 − p1
( a11 + a22 ) − ( a12 + a21 )
a22 − a21
q1 = and q2 = 1 − q1
( a11 + a22 ) − ( a12 + a21 )
163
The game’s value is given by
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Notes
(a11a22 – a12a21)/((a11 + a22) – (a12 + a21))
___________________
Dominance Property ___________________
___________________
For the cases where the payoff matrices are larger than 2 × 2 size,
its size is reduced to 2 × 2 through dominance property. Dominance ___________________
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property achieves this by eliminating such a strategy whose selec- ___________________
tion is impossible.
___________________
Example 7: Reduce the game given below to 2 × 2 and solve it in ___________________
given Figure 23.7:
___________________
Player B
___________________
1 2 3
1 ⎛ 1 7 2⎞ ___________________
Player A 2 ⎜ 6 2 7⎟
⎜ ⎟
3 ⎝ 5 1 6⎠
Solution: Use the dominance property to reduce the matrix. For

the given matrix of player A, all the elements in Row 2 are higher
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than the corresponding elements of Row 3. Player A will not select
strategy 3 due to the fact that profits are less. Row 2 dominates Row
3. Row 3 has to be deleted, as shown in the Figure 23.8
Player B
1 2 3
1 ⎛ 1 7 2⎞
Player A
2 ⎜⎝ 6 2 7⎟⎠
Figure 23.8: Reduction the Matrix by Using Dominance Property
For Player B, Column 1 is dominates Column 3 because Player B

opts for minimum loss. Hence Column 3 must be deleted. We get the
reduced2 × 2 matrix as shown below in Figure 23.9.
Player B
1 2
(c
1 ⎛ 1 7⎞
Player A
2 ⎜⎝ 6 2⎟⎠
Figure 23.9: Reduced 2 × 2 Matrix
Now, solving the 2 × 2 matrix, using the maximin criteria as shown

below in Figure 23.10
164
Player B
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Notes
1 2 Row Min
___________________
1 ⎛ 1 7⎞ 1
Player A
___________________ 2 ⎜⎝ 6 2⎟⎠ 2
___________________ Column Max 6 7
Max Min ≠ Min Max
___________________
2≠6
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___________________ Figure 23.10: Maximin Procedure
___________________
Therefore, there is no saddle point, and the game has a mixed strat-
___________________ egy.
___________________ Applying the probability formula:
___________________
p1 = (2 – 6)/((1 + 2) – (6 + 7)) = 4/10 = 2/5
___________________
p2 = 1 – (2/5) = 3/5
q1 = (2 – 7)/((1+2) – (6+7)) = 5/10 = ½
q2 = 1 – 1/2 = ½
Value of the game = (1*2 – 6*7)/((1+2) – (6+7)) = –40/–10 = 4
The optimum strategies are shown in Figure 23.11 (a) and (b)
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⎛ A1 A2 A3 ⎞ ⎛ B1 B2 B3 ⎞
SA = ⎜ 2 and SB = ⎜ 1
⎝ 5 3
5 0⎠ ⎟ ⎝ 2 1
2 0 ⎟⎠
Figure 23.11 (a, b): Optimum Strategies
Summary
Game theory studies cooperation and conflict amidst intelligent
decision makers based on mathematical observations. It is used in
various fields such as economics, political science, and psychology.
It is also used as logic, computer science, and biology. Currently
game theory is applied to a wide range of behavioral relations. It is
supportive in study of a wide variety of human and animal behav-
iors. Moreover, it also helps in understanding economic behaviors,
including behaviors of firms, markets, and consumers. The other
(c
disciplines where game theory is applicable are mathematics, eco-

nomics, business, political science, biology, and philosophy.
Review Questions
For the below-mentioned game problem in Figure 23.12
165
PlayerB
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Notes
1 2 3 4
1 ⎛5 −10 9 0⎞ ___________________
2 ⎜6 7 8 1⎟ ___________________
PlayerA ⎜ ⎟
3 ⎜8 7 15 1 ⎟ ___________________
4⎜⎝3 4 −1 4⎟
⎠
___________________
Figure 23.12 Game Problem
PE
___________________
1. Calculate whether there exists any saddle point for the above
___________________
matrix.
___________________
2. Transform the game problem into 2 × 2 matrix.
___________________
3. Calculate the optimal strategies for players A and B
___________________
4. Calculate the value of the game. ___________________
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(c
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167
Unit 24
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Notes
Simulation
___________________
___________________
___________________
Objectives:
___________________
After completion of this unit, students shall be able to explain and under-
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stand: ___________________
\l Process and Necessity of Simulation ___________________

\l Why Simulation
___________________
\l Monte Carlo Method
___________________
\l Simulation of Problem of Demand Forecasting
___________________
\l Random Number Generation
\l Advantages and Limitations of Simulations ___________________
Introduction
Simulation is a quantitative technique established to understand
the several course of actions by creating a model of a system and
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then carrying out various trial and error experiments to forecast
the behavior of the model for the given period of time. Studying the
experiments thus conducted is very much like studying that real
system in operation. To study how the real system would react to
certain changes, we can produce these changes in our model and
simulate the reaction of the real system. In fact, under uncertain
conditions simulation is used for decision making process. In cir-
cumstances where quantitative formulation of the problem is not
achievable, a model which represents real life situations is used to
represent simulation technique. Many real-life business problems
are so complicated that it is impossible to transcribe them in math-
ematical equations or to solve the equations even if they could be so
transformed. In our waiting line models studied in Chapter 18, we
developed certain models under the assumptions that the arrival
pattern and service time distribution follow certainly known proba-
(c
bility distributions. But in real-life situations, such probability dis-

tribution patterns are very rarely observed both for arrivals and ser-
vice distributions and they are purely random. In such situations,
the mathematical models that we studied earlier fail to give us any
solution and thus, simulation technique will come to our rescue to
find solutions for such problems.
168
Simulation technique had its origin in the work of Prof. John Von
S
Notes
Neumann and Prof. Stanislaw Ulam, about 30 years ago. They
___________________ solved the nuclear-shielding problems that were either too complex
___________________ for analysis or too expensive to real experimentation. The advent of
high-speed digital computers during the 1950s has made it possible
___________________
to solve several real-life business problems using computer simula-
___________________ tion since this is the only economical and fast method of performing
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___________________ a number of computations required and repeating the experiment a
number of times to obtain more accurate results.
___________________
Because of its vast range of applications, simulation technique has
___________________
become a viable tool. It can be employed for analysis and find solu-
___________________
tions to large and multifaceted real-world problems. Various prob-
___________________ lems of functional areas such as production, marketing, HR, finance
___________________ etc., are solved through simulation. It is also used in corporate plan-
ning models for policy decisions. It helps in reduction of time and
cost involved in the exercise, by generating significant amounts of
data through usage of only a small sample data.
Problem Definition
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Introduction of Variables
Construction of Simulation Model
Testing of variable with values
Simulate
Examination of results
Not Acceptable Not Acceptable
(c
Acceptable
Selection of best alternative
Figure 24.1: Simulation Process
Figure 24.1 describes the simulation process with detailed steps in-
volved. The various steps that are involved are definition of problem,
Unit 24: Simulation
169
variables introduction, simulation model construction, variables
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testing, examination of simulation results, and best alternative to Notes
be chosen. ___________________
___________________
Why Simulation
___________________
With the multi-disciplinary approach to present day complex busi-
___________________
ness problems, often the mathematical solution is difficult to obtain.
PE
___________________
In cases where the implementation of mathematical simplification
is not possible, simulation becomes an appropriate substitute for the ___________________
mathematical evaluation of a model. In this, a specific type of model ___________________
is formulated which describes the system’s operation. The system
___________________
is segregated into various segments and the inter-relationship be-
tween the various segments is made with the help of probability ___________________
distributions by considering the possible state of the system that is ___________________

being studied. The simulation experiment is then performed on the
model of the system. In short, following are the reasons for adopting
simulation in place of other known mathematical techniques:
(i) The simulation may be the only method available As it may

prove difficult to observe the actual environment.
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(ii) It is impossible to develop a mathematical solution.
(iii) Actual observation of a system may be too expensive.
(iv) There may not be sufficient time to allow the system to operate
extensively. For example, one may not be able to wait for sever-
al years to study the long-run trends of sales of a firm, etc.
(v) Actual operation and observation of a real system may be too

disruptive.
Monte Carlo Method

One of the methods of simulation technique is the Monte Carlo meth-
od. Monte Carlo method uses random numbers and is used to solve
problems which involve conditions of uncertainty and where math-
ematical evaluation is not possible. Monte Carlo simulation yields a
(c
solution which should be very close to the optimal, but not necessari-
ly the exact solution. However, it should be noted that this technique
yields a solution that converges to the optimal or correct solution as
the number of simulated trials leads to infinity. This is only possible
with a high-speed digital computer, and therefore, in actual prac-
tice, it is necessary to truncate the simulation process after a finite
170
number of trials. This method of simulation, Monte Carlo simula-
S
Notes
tion, does not expel the requirement of developing a model that will
___________________ depict the operation of the system under study. Hence, the first step
___________________ would be defining the problem and structuring it in a quantitative
format without any concern about its mathematical solvability. It
___________________
should be emphasized that the model developed still needs to be
___________________ a complete and realistic representation of all essential aspects of
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___________________ the system under study. It should be noted that all models are not
amenable to Monte Carlo simulation technique. Only models under
___________________
uncertainty can be studied with the help of Monte Carlo method.
___________________ This is because the Monte Carlo simulation method is based on the
___________________ continued observation of the system over a prolonged period of expe-
___________________
rience. This long history of the operation of the system is simulated
rather than real history. Theoretically, we draw on a large number
___________________
of samples from the model and through these observations examine
the behavior of the system. Without a random aspect to the model,
all samples or trials would yield the same result.
A major implication of Monte Carlo Simulation is that standard

probability distributions like Normal, Poisson, Exponential, etc may
not be followed clearly by the decision variables. Direct observation
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or past records can be used to obtain distribution.
Procedure for Monte Carlo Simulation
Step 1: For analysis of variables, create a probability distribution.
Step 2: Each variable’s cumulative probability distribution to be

found
Step 3: Generate random numbers through a random interval of

variables
Step 4: Until the required number of simulations are generated, the

experiment should be simulated through random selection
of random numbers from random number tables.
Step 5: For validating the model, examine the results.

(c
Simulation of Demand Forecasting Problem

Consider the below example to understand the simulation of de-
mand forecasting problem:
Example 24.1: A restaurant’s record of previous month’s sale of a

particular variety of dish as follows (Refer Table 24.1):
Unit 24: Simulation
171
Table 24.1: Simulation of Demand Problem
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Notes
Demand (No. of Dishes) No of Days
___________________
4 5
5 10 ___________________
6 6
___________________
7 8
8 1 ___________________
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___________________
Simulate the demand for first 10 days of the month.
___________________
Solution: Express the frequencies in terms of proportion and find the
probability distribution of demand by dividing each value by 30(To- ___________________
tal no of Days = 30). ___________________
The demand per day can be represented in the form a distribution as ___________________
shown in Table24.2.below: ___________________

Table 24.2: Probability Distribution of Demand
Demand (No. of Dishes) Probability

4 0.17
5 0.33
6 0.20
7 0.27
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8 0.03
The cumulative probability is calculated and for different demand

levels various set of random number intervals are assigned. Random
numbers are calculated from random tables. Further, cumulative
probability distribution is used to set random numbers, as shown in
Table 24.3.
Table 24.3: Probability Distribution of Demand
Demand (No. Probability Cumulative Random Number

of Dishes) Probability Interval
4 0.17 0.17 00-16
5 0.33 0.50 17-49
6 0.20 0.70 50-69
7 0.27 0.97 70-96
8 0.03 1.00 97-99
(c
Since we have to find the demand for 10 days, 10 random numbers

are selected from the random tables. The random number tables are:
17, 46, 85, 09, 50, 58, 04, 77, 69, 74
17 is the first selected random number that lies between the interval
17–49 of random numbers corresponding to 5 dishes being demand-
172
ed every day. Therefore, 5 is the demand for day one. Table 24.4
S
Notes
shows the remaining days demand:
___________________ Table 24.4: Demand Simulation
___________________ Day 1 2 3 4 5 6 7 8 9 10
___________________ Random 17 46 85 09 50 58 04 77 69 74
Number
___________________ Demand 5 5 7 4 6 6 4 7 6 7
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___________________
Random Number Generation
___________________
Random numbers are used to simulate a sample. Random numbers
___________________ are those numbers which have been selected as such that there is
___________________ an equal selection probability for every number. Once the random
number has been selected, we then convert it into an observation
___________________
drawn from the probability distribution specified in the model under
___________________
study.
In the late 1930s, Kendall and Babington-Smith published 1, 00,000

random numbers which were generated with the help of a spin-
ning disc illuminated by a flash lamp. In 1955, the Rand Corpo-
ration published 10, 00,000 random numbers that were generated
by monitoring a random frequency pulse source (electronic device).
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When the computer is used to process the simulation, it requires
quantities of these random numbers at rapid speed and therefore,
reading them from a tape or disc becomes inadequate. It requires
quantities of these random numbers at rapid speed and, one of the
procedures adopted for generating such random numbers is known
as mid-square method due to Von Neumann and Metropolis (1946).
Following is the rule for generating random numbers using the mid-
square method: Take a four-digit number, and square it. From the
result, take the four digits standing with the third from the right. To
get the second random number start with the new four-digit number
obtained earlier and repeated the procedure. Such a procedure gen-
erally will produce 105 random numbers. For example, if our initial
number is say 4261, then the first random number is 1561 (42612 =
18156121), the second random number is 4367 (15612 = 2436721),
the next random number is 0706 and so on. Repeating this process,
(c
we can draw any number of random numbers.
It should be noted that this is only one of the many methods that are
used for generating random numbers. But no matter what method
is used, careful attention must be given to ensure that the numbers
generated are in fact random, and result in the observations follow-
Unit 24: Simulation
173
ing the probability distribution specified in the model. This is the
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crucial aspect of Monte Carlo simulation. Notes
___________________
If the random number generating process cycles or contains a bias,
the results of simulation will be erroneous. Careful analysis of the ___________________
samples drawn is necessary to ensure that the simulated solution is ___________________

valid. However, there are certain statistical tests used to validate
___________________
the randomness of these generated numbers by various methods.
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___________________
Once the set of valid random numbers are generated, they are then
___________________
used to validate their randomness.
___________________
Advantages and Limitations of Simulation
___________________
The simulation technique is very useful as it allows experimen-
___________________
tation with a model of the real-life system rather than the actual
___________________
operating systems. Many times, experimenting with the system it-
self may prove costly and, in some cases, far too risky. By changing
one or more input variables at a time, it is possible to study the
behavior of the system to determine the major parameters govern-
ing it and set forth recommendations that will improve the overall
performance of the system. Simulation technique allows the firm
to manipulate a replica of the actual system for experimentation
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before committing to large financial outlays.
Use of computers for simulation allows us to incorporate time into

the analysis. In a computer simulation of the business process, one
can study the results for several years or periods within few min-
utes of the computer running time. A computer simulation study is
completely repeatable, that is, the user can exercise complete con-
trol over the development of the model and the use of simulation
routines. Use of special purpose simulation languages reduces pro-
gramming costs, thereby widening their applications to new busi-
ness problems. The simulation does not require simplifications and
assumptions to the extent required in analytical solutions. Gener-
ally, it is easier to explain a simulation model to management per-
sonnel since it is in essence, a description of the behavior of some
system or process. Since mathematics is least used in developing a
(c
simulation model, its acceptance is very wide because every manag-

er would like to implement those models which he can understand
easily. In situations where the solutions can be obtained mathemat-
ically, it is still useful to use simulation to check the correctness of
the analytical solution. In problems where it is difficult to predict or
identify bottlenecks, simulation is used to foresee these unknown
174
difficulties. For example, in production management, one may not
S
Notes
be able to foresee bottlenecks and problems while erecting plant and
___________________ machinery for the first time. Simulation studies are valuable and
___________________ convenient methods for breaking down a complicated system into
sub-systems and study by simulation each of these sub-systems in-
___________________
dividually or jointly with other sub-systems. This type of simulation
___________________ allows one to gain increased knowledge of the operating system. It
PE
___________________ also allows one to observe a cause and effect relationship which can
result in the improvement of the system and its sub-systems.
___________________
___________________ It is convenient to adopt a simulation model as compared to devel-

oping a mathematical model in cases where complex relationships
___________________
of a predictable and random nature exist. Even where activity is
___________________
affected by many random factors wherein each factor can be exam-
___________________ ined separately, the calculation for the probability of the combined
sequence of activities interacting may be difficult to incorporate ef-
ficiently into a mathematical model. In these situations, the use of
random numbers will be as effective as the utilization of some com-
plex models. Many other cases that cannot be solved by standard
mathematical methods can be approximated by simulation.
However, as with the other OR techniques, In cases where complex

)U
relationships of a predictable and random nature exist, a simulat-
ed model is easier to adopt than developing a mathematical model.
Even where activity is affected by many random factors wherein
each factor can be examined separately, the calculation for the prob-
ability of the combined sequence of activities interacting may be dif-
ficult to incorporate efficiently into a mathematical model. In these
situations, the use of random numbers will be as effective as the
utilization of some complex models. Many other cases that cannot
be solved by standard mathematical methods can be approximated
by simulation. However, as with the other OR techniques, there are
certain limitations with the simulation method. It does not produce
optimum solutions. Each simulation runs like a single experiment
conducted under a given set of conditions. Since simulation involves
repetition of the experiment, it is a time-consuming task when man-
(c
ually done. As the number of parameters increases, the difficulty

in finding the optimum values increase, to a considerable extent.
Because of simplicity in the adoption of a simulation process, one
may develop to rely on this technique too often, although the math-
ematical model is more suitable to the situation.
Unit 24: Simulation
175
Advantages and Disadvantages of Simulation Can Be Summed
S
Up as follows: Notes
Advantages ___________________
___________________
l Simulation is the best method for evaluating and analyzing
complicated or completed practical problems which cannot be ___________________
solved with the help of mathematical methods. ___________________
Simulation is flexible; in order to select the best solution
PE
l
___________________
amongst the alternatives changes in the system’s variables can
___________________
be made.
___________________
l System is not disturbed, as the experiments care carried out
with help of a model. ___________________
l Advance knowledge of options and reduction of experimenting ___________________

in real system enables faster policy decisions.
___________________
Disadvantages
l The simulation does not create optimal solutions.
l Developing a good simulation model may be time-consuming.
For certain activities and cases, these models can be expensive. The
)U
decision maker or the operator must provide all the relevant infor-
mation required for the functioning of the model including informa-
tion about the constraints and the conditions. The simulation model
does not provide these conditions on its own.
Summary
Simulation is the use of models to develop data as a basis for techni-
cal decision making. Simulation can be used by an analyst for iden-
tification of possible course of action, introduction of constants and
variables using simulation and identification of probable course of
action and the criteria that act as parameters of effectiveness. It
helps in manipulating various parameters, like revenue and costs
to identify the opportunities for improvement in various operations.
Simulation has innumerable applications. For instance, it may be

(c
helpful to know the operating features of a new airplane by simu-

lating flight conditions in a wind tunnel, hydraulic analog models
of production processes or in mathematical models like inventory
control, network analysis or production scheduling. The other fields
where simulation techniques play an significant role are in the plan-
ning process of the military, traffic control, medical diagnosis and
176
hospital emergency services, location analysis like determining lo-
S
Notes
cations for warehouses and plants and evaluation of industrial pol-
___________________ icies.
___________________
Review Questions
___________________
___________________
1. What is a simulation? Give a few areas of its application.
PE
___________________ 2. Explain the procedure of simulation using random numbers.
___________________ 3. Explain how simulation is useful in solving queuing and inven-

___________________ tory problems. Give examples.
___________________ 4. A retailer sells a particular model of a refrigerator for which

___________________
the probability distribution of daily demand is given in the ta-
ble below:
___________________
Demand/Day 0 1 2 3 4 5
Demand 0.05 0.25 0.20 0.25 0.10 0.15
Find the average demands of refrigerators per day.
5. At a car service/repair station, cars arrive daily for servicing,

wash, and repairs. The frequencies of the number of cars that
)U
arrive are given in the table below. Simulate the number of
cars that will arrive for the next 10 days. Use the following
random numbers: 87, 01, 74, 11, 46, 82, 59, 94, 25 and 34.
Car Arrival per Day 5 6 7 8 9 10

Frequency 4 3 6 5 1 1
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177
Unit 25
S
Notes
Case Study: SM Textiles –

___________________
___________________
Decoding Transportation Model ___________________
___________________
SM Textiles is one of the largest manufactures of readymade gar-
PE
ments in south India. It was established in the year 1985 and was ___________________
operating out of a single manufacturing unit in Chennai, but now it
___________________
also has manufacturing units located in Mysore and Vishakhapa-
tnam. The vision of the company is ‘To bring authentic clothing to ___________________
India.’ The company’s annual turnover is Rs. 50Cr and plans to
___________________
spread its distribution centers all over India. The company’s larg-
est wholesaler distributors currently are limited to 4 locations Ban- ___________________
galore, Hyderabad, Cochin, and Madurai. ___________________
The issue faced by the company over the recent years after the
expansion of its business is to control the transportation cost. The
company struggles to minimize the transportation cost of move-
ment of ready-made garments from the manufacturing units to the
distribution locations. Thus, the company hires an analyst who un-
derstands the issue at hand and provides an optimal solution to
this problem.
)U
The capacities of the 3 manufacturing units located in Chennai,
Mysore, and Vishakhapatnam are 6,000, 5,000 and 4,000 units
per week respectively whereas the capacities of the 4 distribution
centers located in Bangalore, Hyderabad, Cochin and Madurai are
5,000, 4,000, 2,000 and 4,000 units per week respectively. The cost
of the transportation per unit differs across different supply points
and destination points.
The management of SM Textiles would like to determine the

number of units to be shipped from each textile unit to satisfy the
demand of each wholesale distributor. The supply, demand, and
transportation cost are as follows:
Table 25.1: Supply Capacity at Manufacturing Centres
Supply Textile Units Weekly Production (Per Unit)

1 Chennai 6000
(c
2 Mysore 5000
3 Vishakhapatnam 4000
178
S
Table 25.2: Demand Requirements at Distribution Centres
Notes
Destination Wholesale Distributor Weekly Demand (Units)
___________________
1 Bangalore 5000
___________________
2 Hyderabad 4000
___________________ 3 Cochin 2000
4 Madurai 4000
___________________
Table 25.3: Transportation Cost per Unit
PE
___________________
Supply Location Destination Location
___________________
___________________ Bangalore Hyderabad Cochin Madurai

Chennai 5 6 9 7
___________________ Mysore 7 8 2 4
___________________ Vishakhapatnam 6 3 5 3
___________________ Thus, a transportation model is to be used to decide the number of

units shipped from each source to destination.
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PE
S

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(c

Mr. Utpal Ghosh

Dr. S J Chopra Dr. Deependra Kumar Jha

Dr D N Pandey Dr Kamal Bansal Dr Tabrez Ahmad

SLM Development Team

Dr. Rajesh Gupta Dr. Meenakshi Sharma Dr. Rakhi Dawar

Mr. Rahul Sharma Mr. Shantanu Trivedi Ms. Aparna

Dr. Rajesh Gupta

Course Code: MBCQ 721D

Course Name: Quantitative Techniques for Management Applications

Version: January 2018

Unit 1: Quantitative Techniques: An Introduction ....................................................................3

Unit 6: Determinants .................................................................................................................37

Unit 16: Central Tendency of Data ...........................................................................................113

Unit 17: Measures of Dispersion ...............................................................................................119

ll Role of QT in Business and Industry UNIT 4: MATHEMATICAL OPERATIONS

UNIT 2: DECISION MAKING ll Review Questions

Quantitative techniques help managers in various domains like

nication and advanced defense planning.

Quantitative techniques are extensively used in making decisions

(i) Availability of a variety of quantitative tools to analyze intri-

Quantitative methods or techniques are the methods used by a de-

Classification of Quantitative Techniques

● Quantitative Techniques based on mathematical calculations

● Quantitative Techniques based on statistical calculations

● Quantitative Techniques based on programming

1. Quantitative Techniques based on mathematical calcu-

lations: The techniques that use mathematical principles to

(i) Combinations and Permutations: The term “permu-

on selecting the objects without considering the order in ___________________

is used to identify different types of algebra calculations ___________________

application in calculus, it can also be used to represent

2. Quantitative Techniques based on statistical calculations:

(i) Collection of Data: It is the first and foremost step for

(ii) Measures of Dispersion, Kurtosis, Central Tendency,

(a) Central Tendency: This technique provides us with

(c) Skewness: Skewness means ‘Lack of symmetry.’ The

(d) Kurtosis: Kurtosis enables us to understand the

(iii) Correlation and Regression Analysis: Linear rela-

(iv) Index Numbers: Rightfully described as economic ba-

and various other things, for a given time period. It is be-

(v) Time Series Analysis: This technique is used for under-

ticular things under assumptions for missing statistics ___________________

services. It can also be used for measuring as well con- ___________________

(x) Testing of Hypothesis: Testing of the hypothesis is a

3. Programming Techniques: These are the model building

(i) Linear Programming: is a mathematical method to

(ii) Queuing Theory: is a study of queues or lines through

(iii) Game Theory: The mathematical model of the game the-

ory is the study of two or more players to get an outcome

(iv) Decision Theory: Decision theory is a mathematical

(viii) Nonlinear Programming: The nonlinear programming

Example 1.1: If a company which has already launched a product

● Cost-Benefit Analysis: The Company can conduct a cost-ben-

efit analysis to compare the total cost required for products A

● Gather market data to gauge target customer’s interest in the

vis the new product. ___________________

● Financial models can be constructed using linear programming ___________________

(a) Market research analysis.

(b) Statistical details of records for upkeep of a vast market.

(a) Controlling and planning production.

(c) Requirements for control of quality.

(d) Measures for Inventory control.

The expected payoff will be 0.6Maximum Payoff + 0.4 Minimum

Expected value for alternative1 = (0.650) + (0.410) = 34

Expected value for alternative2 = (0.660) + (0.420) = 44

Expected value for alternative3 = (0.640) + (0.45) = 26