BUSINESS STATISTICS Unit-4

(II SEM)
INTRODUCTION TO PROBABILITY
Even in out day-to-day life we say or hear phrases like “It may rain today” ;
“Probably I will get a first class in the examination”; “India might draw or win the
cricket series against Australia”; and so on. In all the above cases there is involved
an element of uncertainty or chance.

A numerical measure of uncertainty is provided by a very important branch of

Statistics called the “Theory of Probability”. In the words of Prof. Ya-Lin-Chou :
“Statistics is the science of decision making with calculated risks in the face of
uncertainty”.

Concepts will be explained with reference to simple experiments relating to tossing

of coins, throwing of a die* or drawing cards from a pack of cards. Unless otherwise
stated, we shall assume that coin or die is uniform or unbiased or regular and pack of
cards is well shuffled.
TERMINOLOGY
Random Experiment. An experiment is called a random experiment if when
conducted repeatedly under essentially homogeneous conditions, the result is not
unique but may be any one of the various possible outcomes.
Trial and Event. Performing of a random experiment is called a trial and outcome
or combination of outcomes are termed as events. For example :
(i) If a coin is tossed repeatedly, the result is not unique. We may get any of the two
faces, head or tail. Thus tossing of a coin is a random experiment or trial and getting
of a head or tail is an event.
(ii) Similarly, throwing of a die is a trial and getting any one of the faces 1, 2, …, 6 is
an event, or getting of an odd number or an even number is an event ; or getting a
number greater than 4 or less than 3 are events.
(iii) Drawing of two balls from an urn containing ‘a’ red balls and ‘b’ white balls is a
trial and getting of both red balls, or both white balls, or one red and one white ball
are events.
Exhaustive Cases. The total number of possible outcomes of a random experiment is
called the exhaustive cases for the experiment. Thus, in toss of a single coin, we can
get head (H) or tail (T). Hence exhaustive number of cases is 2, viz., (H, T ). If two
coins are tossed, the various possibilities are HH, HT, TH, TT where HT means head
on the first coin and tail on second coin, and TH means tail on the first coin and head
on the second coin and so on. Thus, in case of toss of two coins, exhaustive number
of cases is 4, i.e. Similarly, in a toss of three coins the possible number of outcomes
is :

= HHH, HTH, THH, T TH, HHT, HT T, THT, T T T

Favourable Cases or Events. The number of outcomes of a random experiment
which entail (or result in) the happening of an event are termed as the cases
favourable to the event. For example :
(i) In a toss of two coins, the number of cases favourable to the event ‘exactly one
head’ is 2, viz., HT, TH and for getting ‘two heads’ is one viz., HH.
(ii) In drawing a card from a pack of cards, the cases favourable to ‘getting a
diamond’ are 13 and to ‘getting an ace of spade’ is only 1.
Mutually Exclusive Events or Cases. Two or more events are said to be mutually
exclusive if the happening of any one of them excludes the happening of all others in
the same experiment. For example, in toss of a coin, the events ‘head’ and ‘tail’ are
mutually exclusive because if head comes, we can’t get tail and if tail comes we
can’t get head. Similarly, in the throw of a die, the six faces numbered 1, 2, 3, 4, 5
and 6 are mutually exclusive. Thus, events are said to be mutually exclusive if no
two or more of them can happen simultaneously.
Equally Likely Cases. The outcomes are said to be equally likely or equally
probable if none of them is expected to occur in preference to other. Thus, in tossing
of a coin (dice), all the outcomes, viz., H, T (the faces 1, 2, 3, 4, 5, 6) are equally
likely if the coin (die) is unbiased.
PROBABILITY DISTRIBUTION
Probability distribution yields the possible outcomes for any random event. It is also
defined based on the underlying sample space as a set of possible outcomes of any
random experiment. These settings could be a set of real numbers or a set of vectors
or a set of any entities. It is a part of probability and statistics.

Random experiments are defined as the result of an experiment, whose outcome

cannot be predicted. Suppose, if we toss a coin, we cannot predict, what outcome it
will appear either it will come as Head or as Tail. The possible result of a random
experiment is called an outcome. And the set of outcomes is called a sample point.
With the help of these experiments or events, we can always create a probability
pattern table in terms of variables and probabilities.
PROBABILITY DISTRIBUTION OF RANDOM VARIABLES

A random variable has a probability distribution, which defines the probability of its
unknown values. Random variables can be discrete (not constant) or continuous or both.
That means it takes any of a designated finite or countable list of values, provided with a
probability mass function feature of the random variable’s probability distribution or can
take any numerical value in an interval or set of intervals. Through a probability density
function that is representative of the random variable’s probability distribution or it can
be a combination of both discrete and continuous.
A probability distribution is a formula or a table used to assign probabilities to each
possible value of a random variable X. A probability distribution may be
either discrete or continuous. A discrete distribution means that X can assume one of a
countable (usually finite) number of values, while a continuous distribution means
that X can assume one of an infinite (uncountable) number of different values.
Normal Probability Distributions
The normal or Gaussian Probability Distribution is most popular and important
because of its unique mathematical properties which facilitate its application to
practically any physical problem in the real world; if not for the data’s distribution
directly, then in terms of the sampling distribution, this will be the discussion in
next Section . It constitutes the basis for the development of many of the statistical
methods.
The normal probability distribution was discovered by Abraham De Moivre in 1733
as a way of approximating the binomial probability distribution when the number of
trials in a given experiment is very large. In 1774, Laplace studied the mathematical
properties of the normal probability distribution. Through a historical error, the
discovery of the normal distribution was attributed to Gauss who first referred to it in
a paper in 1809.

In the nineteenth century, many scientists noted that measurement errors in a given
experiment followed a pattern (the normal curve of errors) that was closely
approximated by this probability distribution. The normal probability distribution is
formally defined as follows:
Normal Probability Distribution

A continuous random variable X is normally distributed or follows a normal probability distribution if its
probability distribution is given by the following function:

The universally accepted notation X~N(μ, σ2) is read as “the continuous random variable X is normally
distributed with a population mean μ and population variance σ2. Of course in real world problems we do not
know the true population parameters, but we estimate them from the sample mean and sample variance.
However, first, we must fully understand the normal probability distribution.
The graph of the normal probability distribution is a “bell-shaped” curve, as shown
in Figure. The constants μ and σ2 are the parameters; namely, “μ” is the population
true mean (or expected value) of the subject phenomenon characterized by the
continuous random variable, X, and “σ2” is the population true variance
characterized by the continuous random variable, X.
Hence, “σ” the population standard deviation characterized by the continuous
random variable X; and the points located at μ−σ and μ+σ are the points of
inflection; that is, where the graph changes from cupping up to cupping down.

Figure Normal probability with points of inflections μ − σ and μ + σ.

The area under the bell-shaped curve is so disposed that it represents probability; that is, the total area under the

curve is equal to one. The random variable X can assume values anywhere from minus infinity to plus infinity,

but in practice we very seldom encounter problems in which random variables have such a wide range.

The normal curve graph of the normal probability distribution) is symmetric with respect to the mean μ as

the central position. That is, the area between μ and κ units to the left of μ is equal to the area

between μ and κ units to the right of μ. This fact is illustrated in Figure B.

Figure B Normal probability from the center, μ to μ + κ; that is, k above center.
Pμ≤X≤μ+κ
There is not a unique normal probability distribution, since the mathematical formula of
the graph depends on the two variables, the mean μ and the variance σ2. Figure C is a
graphical representation of the normal distribution for a fixed value of σ2 with μ varying.

Figure C. Normal probability distribution for fixed σ and varying μ.

You recall that the variance or standard deviation is a measure of the spread or
“dispersion” of the random variable X around its expected value or central
tendency, μ. Thus, σ2 of the normal distribution determines the shape of the bell-
shaped curve.

Graphical representation of the normal distribution for a fixed value of μ with

varying σ2. Thus, the expected value μ, locates the central tendency of the random
variable, X, and the variance σ2 determines the shape of the bell-shaped curve. That
is, for small values of σ2, the distribution is clustered close to the mean;
as σ2 increases, the distribution deviates away from the mean. Despite the fact that
the shapes are different, the total area under each curve which represents probability
is equal to one.
3.2.4 Normal probability distribution
The single most important distribution in probability and statistics is the normal probability
distribution. The density function of a normal probability distribution is bell shaped and
symmetric about the mean. The normal probability distribution was introduced by the
French mathematician Abraham de Moivre in 1733. He used it to approximate probabilities
associated with binomial random variables when n is large. This was later extended by
Laplace to the so-called CLT, which is one of the most important results in probability.

Carl Friedrich Gauss in 1809 used the normal distribution to solve the important statistical
problem of combining observations. Because Gauss played such a prominent role in
determining the usefulness of the normal probability distribution, the normal probability
distribution is often called the Gaussian distribution. Gauss and Laplace noticed that
measurement errors tend to follow a bell-shaped curve, a normal probability distribution.
Today, the normal probability distribution arises repeatedly in diverse areas of applications.
For example, in biology, it has been observed that the normal probability distribution fits
data on the heights and weights of human and animal populations, among others.
3.2.4 Normal probability distribution
We should also mention here that almost all basic statistical inference is based on the
normal probability distribution. The question that often arises is, when do we know
that our data follow the normal distribution?
To answer this question, we have specific statistical procedures that we study in later
chapters, but at this point we can obtain some constructive indications of whether the
data follow the normal distribution by using descriptive statistics. That is, if the
histogram of our data can be capped with a bell-shaped curve (Fig. 3.2), if the stem-
and-leaf diagram is fairly symmetrical with respect to its center, and/or by invoking
the empirical rule “backward,” we can obtain a good indication of whether our data
follow the normal probability distribution.
PROPERTIES OF A NORMAL
DISTRIBUTION
The mean, mode and median are all equal.
The curve is symmetric at the center (i.e. around the mean, μ).
Exactly half of the values are to the left of center and exactly half the values are to
the right.
The total area under the curve is 1.