Lecture 4

Probability and Normal Distribution

 Contents

1. Uncertainty and Probability

2. Random Variable and Probability Distribution

3. Discrete Probability Distribution

4. Continuous Probability Distribution: Normal Distribution

5. Sampling Distribution

6. Link to a part of P4
 Contents

1. Uncertainty and Probability

2. Random Variable and Probability Distribution

3. Discrete Probability Distribution

4. Continuous Probability Distribution: Normal Distribution

5. Sampling Distribution

6. Link to a part of P4
 Uncertainties

• Managers often base their decisions on an analysis of

uncertainties such as the following:
– What are the chances that the sales will decrease if we
increase prices?
– What is the likelihood a new assembly method will increase
productivity?
– What are the odds that a new investment will be profitable?
 Probability

• Probability is a numerical measure of the likelihood that an event will occur.

• Probability values are always assigned on a scale from 0 to 1.
• A probability near zero indicates an event is quite unlikely to occur.
• A probability near one indicates an event is almost certain to occur.
 Example

Example: Rolling a Die

•If an experiment has n possible outcomes, the classical
method would assign a probability of 1/n to each outcome.
•Probabilities: Each sample point has a 1/6 chance of
occurring
 Contents

1. Uncertainty and Probability

2. Random Variable

3. Discrete Probability Distribution

4. Continuous Probability Distribution: Normal Distribution

5. Sampling Distribution

6. Link to a part of P4
 Random Variables

• A random variable is a numerical description of the

outcome of an experiment.
• A discrete random variable may assume either a finite
number of values or an infinite sequence of values.
• A continuous random variable may assume any numerical
value in an interval or collection of intervals.
 Discrete Random Variable
with a Finite Number of
Values

Example: JSL Appliances

• Let x = number of TVs sold at the store in one day, where x
can take on 5 values (0, 1, 2, 3, 4)

• We can count the TVs sold, and there is a finite upper limit on
the number that might be sold (which is the number of TVs in
stock).
 Discrete Random Variable
with an Infinite Number of
Values
• Example: JSL Appliances
• Let x = number of customers arriving in one day, where x
can take on the values 0, 1, 2, . . .
• We can count the customers arriving, but there is no finite
upper limit on the number that might arrive.
 Continuous Random
Variable always with an
infinite number of values
Example: Height of a random student
• Let x = height of a random student in Greenwich
University.
• It could take real values like 150.0cm; 150.8cm;
150.83cm; etc.
 Probability Distributions

• The probability distribution for a random variable describes

how probabilities are distributed over the values of the
random variable.
• The cumulative distribution function: a function that gives the
probability that a random variable is less than or equal to the
independent variable of the function.
• Discrete probability distribution is probability distribution for a
discrete random variable.
• Continuous probability distribution is probability distribution for
a continuous random variable.
 Contents

1. Uncertainty and Probability

2. Random Variable and Probability Distribution

3. Discrete Probability Distribution

4. Continuous Probability Distribution: Normal Distribution

5. Sampling Distribution

6. Link to a part of P4
 Discrete Probability
Distribution
• The probability distribution is defined by a probability
function, denoted by f(x), that provides the probability for
each value of the random variable.
• The required conditions for a discrete probability function
are:
 Discrete Probability
Distributions
• Example: JSL Appliances
• Using past data on TV sales, a tabular representation of the probability
distribution for sales was developed.
 Discrete Probability
Distributions
• Example: JSL Appliances
 Discrete Probability
Distributions
• In addition to tables and graphs, a formula that gives the
probability function, f(x), for every value of x is often used
to describe the probability distributions.
• Several discrete probability distributions specified by
formulas are the discrete-uniform, binomial, Poisson, and
hypergeometric distributions.
• We only study Poison distribution
 Poisson Probability
Distribution
– A Poisson distributed random variable is often useful in estimating the
number of occurrences over a specified interval of time or space.
– It is a discrete random variable that may assume an infinite sequence of
values (x = 0, 1, 2, . . . ).
– Examples of Poisson distributed random variables:
• number of knotholes in 5 linear meters of pine board
• number of vehicles arriving at a toll booth in one hour

– Bell Labs used the Poisson distribution to model the arrival of phone calls.
Poisson Probability
Distribution
• Example: Mercy Hospital
• Patients arrive at the emergency room of Mercy Hospital at the average rate
of 6 per hour on weekend evenings.
• What is the probability of 4 arrivals in 30 minutes on a weekend evening?
• Using the probability function with 𝜇 = 6/hour = 3/half-hour and x = 4
 Poisson Probability
Distribution
• Example: Mercy Hospital
 Contents

1. Uncertainty and Probability

2. Random Variable and Probability Distribution

3. Discrete Probability Distribution

4. Continuous Probability Distribution: Normal Distribution

5. Sampling Distribution

6. Link to a part of P4
 Continuous Probability
Distribution
• A continuous random variable can assume any value in an
interval on the real line or in a collection of intervals.
• It is not possible to talk about the probability of the random
variable assuming a particular value.
• Instead, we talk about the probability of the random variable
assuming a value within a given interval.
• The probability of the random variable assuming a value within some given
interval from x1 to x2 is defined to be the area under the graph of the
probability density function between x1 and x2.
 Normal Distribution

• The normal probability distribution is the most important distribution

for describing a continuous random variable.
• It is widely used in statistical inference.
• It has been used in a wide variety of applications including:
– Heights of people
– Amount of rainfall
– Test scores
– Scientific measurements
• Abraham de Moivre, a French mathematician, published The
Doctrine of Chances in 1733.
• He derived the normal distribution.
 Normal Distribution

A random variable having a normal distribution with a mean of 0 and a

standard deviation of 1 is said to have a standard normal probability
distribution. The letter z is used to designate the standard normal
random variable.
Normal Probability Distribution
 Normal Probability Distribution

Exercise 1 Exercise 2
If X is normal random variable, then X ~N(15, 0.8), where could you find
95% of value of X fall within…. 2/3 value of X?
A.One standard deviation of the A.13,89
mean B.15,36
B.2 standard deviations of the C.17,23
mean
C.3 standard deviations of the
mean
 Exercise

Example: Pep Zone

Pep Zone sells auto parts and supplies including a popular multi-grade motor oil.
When the stock of this oil drops to 20 liters, a replenishment order is placed.
The store manager is concerned that sales are being lost due to stockouts while
waiting for a replenishment order.

It has been determined that demand during replenishment lead-time is normally

distributed with a mean of 15 liters and a standard deviation of 6 liters.

The manager would like to know the probability of a stockout during replenishment
lead-time. In other words, what is the probability that demand during lead-time will
exceed 20 liters?
 Using Excel to Compute
Normal Probabilities
• Excel has two functions for computing cumulative
probabilities and x values for any normal distribution:
• NORM.DIST is used to compute the cumulative
probability given an x value.
• NORM.INV is used to compute the x value given a
cumulative probability.
 Exercise

For borrowers with good credit scores, the mean debt for revolving and
installment accounts is $15,015 (BusinessWeek, March 20, 2006).
Assume the standard deviation is $3540 and that debt amounts are
normally distributed.
•a. What is the probability that the debt for a borrower with good credit
is more than $18,000?
•b. What is the probability that the debt for a borrower with good credit
is less than $10,000?
•c. What is the probability that the debt for a borrower with good credit
is between $12,000 and $18,000?
•d. What is the probability that the debt for a borrower with good credit
is no more than $14,000?
 Contents

1. Uncertainty and Probability

2. Random Variable and Probability Distribution

3. Discrete Probability Distribution

4. Continuous Probability Distribution: Normal Distribution

5. Sampling Distribution

6. Link to a part of P4
 Sampling Distribution

CENTRAL LIMIT THEOREM

•In selecting random samples of size
n from a population, the sampling
distribution of the sample mean can
be approximated by a normal
distribution as the sample size
becomes large (Law of Large
numbers).
 Sampling Distribution

1. The probability density function of the sampling

distribution of means is normally distributed regardless of
the underlying distribution of the population observations
and
2. standard deviation of the sampling distribution decreases
as the size of the samples that were used to calculate
the means for the sampling distribution increases.
Central Limit Theorem
 Exercise

Foot Locker Store Productivity. Foot Locker uses sales per square foot as a
measure of store productivity. Sales are currently running at an annual rate
of $406 per square foot. You have been asked by management to conduct a
study of a sample of 64 Foot Locker stores. Assume the standard deviation
in annual sales per square foot for the population of all 3400 Foot Locker
stores is $80.
a. Show the sampling distribution of x, the sample mean annual sales per
square foot for a sample of 64 Foot Locker stores.
b. What is the probability that the sample mean will be within $15 of the
population mean?
c. Suppose you find a sample mean of $380. What is the probability of
finding a sample mean of $380 or less? Would you consider such a sample
to be an unusually low-performing group of stores?
 Contents

1. Uncertainty and Probability

2. Random Variable and Probability Distribution

3. Discrete Probability Distribution

4. Continuous Probability Distribution: Normal Distribution

5. Sampling Distribution

6. Link to a part of P4
A part of P4
THE END