UNIT I

Definition of statistics
A. L. Bowley says “Statistics may be called the science of counting”.

Boddington has defined statistics as the science of “estimates and probabilities”.

Statistics should possess the following characteristics :

1) They should be aggregate of facts
2) They should be affected to a marked extent by multiplicity of causes
3) They should be numerically expressed
4) They should be enumerated or estimated according to reasonable standards of accuracy
5) They should be collected in a systematic manner
6) They should be collected for a predetermined purpose
7) They should be placed in relation to each other

Functions of Statistics
1. It presents facts in a definite form
2. It simplifies mass of figures
3. It facilitates comparison
4. It helps in formulating and testing hypothesis
5. It helps in prediction
6. It helps in the formulation of the suitable policies

Limitations of Statistics
1. It does not deal with individual measurements
2. It does only deal with quantitative characteristics
3. Its results are true only on an average
4. It is only one of the methods of studying a problem
5. Statistics can be misused
Statistics in Business and Management
Statistics influence the operations of business and management in many dimensions. Statistical
applications include the area of production, marketing, promotion of product, financing,
distribution, accounting, marketing research, manpower planning, forecasting, research and
development and so on. As the organizational structure has become more complex and the
market highly competitive, it has become necessary for executives to base their decisions on the
basis of elaborate information systems and analysis instead of intuitive judgment. In such
situations, statistics are used to analyse this vast data for extracting relevant information. Some
of the typical areas of business operations where statistics have been extensively and effectively
used are as follows :
1) Entrepreneuring – if you are opening a new business or acquiring one, it is necessary to
study the market as well as the resources from statistical point of view to ensure success
of the new venture. A shrewd businessman must make proper and scientific analysis of
the past records and current market trends in order to predict the future course for
business decisions. The analysis of the needs and wants of the consumers, the number of
competitors in the market and heir marketing strategies, availability of resources and
general economic conditions and trends would all be extremely helpful to the
entrepreneur. A number of new enterprises have failed either due to unreliability of data
or due to faulty interpretations and conclusions.

2) Production – The production of any item depends upon the demand of that item and this
demand must be accurately forecast using statistical techniques. Similarly, decisions as to
what to produce and how much to produce are based largely upon the feedback of
surveys that are analyzed statistically.

3) Marketing – An optimum marketing strategy would require a skillful analysis of data on

population, shifts in population, disposable income, competition, social and professional
status of target market, advertising, quality of sales people, easy availability of the
product and other related matters. These variables and their inter-relationship must be
statistically studied and analyzed.
4) Purchasing – The purchasing department of an organization makes decisions regarding
the purchase of raw materials and other supplies from different vendors. The statistical
data in the cost structure would assist in formulating purchasing policies as to where to
buy, at what price to buy and how much to buy at a given time.

5) Investment – Statistics have been almost in dispensable in making a sound investment

whether it be buying or selling of stocks and securities or real estate. The financial
newspapers are full of tables and graphs analyzing the prices of stocks and their
movements. Based upon these statistical data, a good investor will buy when the prices
are at their lowest and sell when the prices are at their highest. Similarly, buying an
apartment building would require that an investor take into consideration the rent
collected, rate of occupancy, any rent control laws, cost of the mortgage obtained and the
age of the building before making a decision about investing in real estate.

6) Banking – Banks are highly affected by general economic and market conditions. Many
banks have research departments which gather and analyse information not only about
general e economic conditions but also about businesses in which they may be directly
or indirectly involved. They must be aware of money markets, inflation rates and so on,
not only in their own vicinity but also nationally and internationally. Many banks have
lost money in international operations, sometimes in as simple a matter as currency
fluctuations because they did not analyze the international economic trends correctly.
Many banks have failed because they over-extended themselves in making loans without
properly analyzing the general business conditions.

7) Quality control – Statistics are used in quality control so extensively that even the
phenomenon itself is known as statistical quality control. Statistical Quality Control
(SQC) consists of using statistical methods to gather and analyze data on the
determination and control of quality. This technique primarily deals with the samples
taken randomly and as representative of the entire population from which these random
samples were taken. The concept is similar to testing one spoonful from a pot of stew and
 deciding whether it needs more salt or not. The characteristics of samples are analyzed by
statistical quality control and the use of other statistical techniques.

8) Personnel – Study of statistical data regarding wage rates, employment trends, cost of
living indexes, work related accident rates, employee grievances, labour turnover rates,
records of performance appraisal and so on and the proper analysis of such data assist the
personnel departments in formulating the personnel policies and in the process of
manpower planning.

Statistics and Computers

It is difficult to overstate the importance of the computer to present day statistics. The modern
electronic computer is capable of performing millions of calculations in mere seconds. This is of
great benefit to business and other organizations maintaining record of their operations. The
development of statistics has been closely related to the evolution of electronic computing
machinery. Statistics is a form of data processing, a way of converting data into information
useful for decision making.
As statistical theories become more complex, it becomes more difficult to perform the
calculations needed to apply to these theories. So, in one sense, the development of statistical
theory and electronic computers reinforce each other. As statisticians devise new ways of
describing and using data for decisions, computer scientists respond with newer and more
efficient ways of performing these operations. With the evolution of more powerful computing
techniques people in statistics are encouraged to explore new and more sophisticated methods of
statistical analysis.
Today more and more people are having direct contact with computers. However, the output
from a computer is only as good as the data input.

Measures of Central Tendency

A figure which is used to represent a whole series should neither have the lowest value in the
series nor the highest value but a value somewhere between these two limits, possibly in the
centre, where most of the items of the series cluster. Such figures are called Measures of Central
tendency or Averages. The average represents a whole series and as such, its value always lies
between the minimum and maximum values and generally it is located in the centre or middle of
the distribution.

Definition of Measure of Central Tendency

Simpson and Kafka observe that “A measure of central tendency is a typical value around which
other figures congregate”.

Characteristics of a good average

1) It should be rigidly defined
2) It should be based on all the observations of the series
3) It should be capable of further algebraic treatment
4) It should be easy to calculate and simple to follow
5) It should not be affected by fluctuations of sampling

Arithmetic average or Mean

Mean of a series is the figure obtained by dividing the total values of the various items by their
number.

Merits of Arithmetic average

1) It is rigidly defined and a biased investigator shall get the same arithmetic average from the
series as an unbiased one
2) An average should be based on all the observations of a series.
3) It is also capable of further algebraic treatment
4) It is easy to calculate and simple to follow
5) It should be least affected by fluctuations of sampling

Drawbacks of arithmetic average

1) Since arithmetic average is calculated from all the items of a series sometimes the
abnormal items may considerably affect this average.
 2) The arithmetic average cannot be calculated without all the items
3) Calculation of mean is more difficult than mode and median.
4) Mean could be a number which does not exist in the series
5) It sometimes gives a result which appear almost absurd
6) Sometimes it gives fallacious conclusions
7) The arithmetic average gives more importance to higher items of a series and lesser
importance to smaller items.

When to use Weighted Arithmetic Average :

• When the importance of all the items on a series is not equal.
• When the classes of the same group contain widely varying frequencies
• When there is change either in the proportion of values of items or in the
proportion of their frequencies
• When ratios, percentages or rates are being averaged
• When it is desired to calculate the average of series from the average of its
component parts

Geometric mean
Geometric mean is the nth root of the product of n items of a series. Thus if the geometric mean
of 3, 6, 8 is to be calculated it would be equal to the cube root of the product of these figures.
The calculation of geometric mean by this process is possible only if the number of items is very
few. In case, there are more number of items, then logs are to be applied for calculation. The
geometric mean is the anti-log of the arithmetic average of the logs of the values of a variable. It
is also possible to assume log mean and to find out deviations from it and then calculate the
geometric mean.

Merits of Geometric mean

1) It is rigidly defined and its value is a precise figure
2) It is based on all the observations of a series
3) it is capable of further algebraic treatment
 4) It is not much affected by the fluctuations of sampling

Demerits of Geometric mean

1) It is neither easy to calculate not is it simple to understand
2) If any value in a series is zero, the geometric mean would also be zero.
3) It may be a value which does not exist in the series.
4) The property of giving more weight to smaller items may in some cases prove to be a
drawback of the geometric mean.

Harmonic Mean
Harmonic mean of a series is the reciprocal of the arithmetic average of the reciprocals of the
values of its various items.

Merits of Harmonic mean

1) Harmonic mean satisfies the test of rigid definition. Its definition is precise and its value
is definite
2) It is based on all observations of the series.
3) Harmonic mean is capable of further algebraic treatment
4) Like geometric mean this average is not affected very much by fluctuations of sampling
5) It gives greater importance to small items and as such a single big item cannot push up its
value
6) It measures relative changes and is extremely useful in averaging certain types of ratios
and rates

Demerits of Harmonic mean

1) It is not readily understood nor can it be calculated with ease
2) It gives a very high weightage to small items and for analysis of economic data is not
very useful.
3) It is usually a value which does not exist in a series
4) Generally it is not a good representative of a statistical series.
Median
It is said to be a positional average. Its value is the value of the middle item irrespective of all
other values.

Merits of Median
1) It is rigidly defined
2) It can be easily calculated and it is understood without any difficulty
3) It is not affected by the values of the extreme items as such.
4) Even if the value of the extremes is not known median can be calculated if the number of
items is known.
5) It can be located merely by inspection in many cases
6) It gives best results in a study of those phenomena which are incapable of direct
quantitative measurement.

Drawbacks of Median
1) Median may not be representative of a series in many cases
2) It is not suitable for further algebraic treatment
3) If big or small items in a series are to receive greater importance, median would not be
suitable average
4) Median is more likely to be affected by the fluctuations of sampling than the arithmetic
average
5) The arrangement of items in ascending order is sometimes very tedious.

Mode
Mode is the most common item of a series. Generally, it is the value which occurs the largest
number of times in a series.

Merits of Mode
1) It can be determined without much mathematical calculation
2) It is commonly understood
 3) It is a value which is found in the series unlike arithmetical average which is sometimes
not found in series.
4) Mode is not affected by the values of extreme items provided they adhere to the natural
law relating to extremes
5) For the determination of mode it is not necessary to know the values of all the items of a
series.

Drawbacks
1) Mode is ill-defined, indeterminate and indefinite
2) Mode is not based on all the observations of a series
3) Mode is not capable of further mathematical treatment
4) Mode may be unrepresentative in many cases
5) In many cases it may be impossible to get a definite value of mode, where there are 2,3,
or more modal values.

Choice of an average
1) The object or the purpose for which an average is being calculated
2) Whether the average would be used for further statistical computations
3) The nature and type of data

Limitations of averages
1) It is a single figure representing a series and no single figure can condense in itself all the
properties of the items which it represents.
2) An average may give us a value which does not exist in the data
3) At times the average may give us as absurd figure
4) Averages do not throw light on the formation of the series like the average of following
two series is 20 :
a. 2, 3, and 55
b. 19, 20 and 21