Introduction to Probability and Normal

Probability Distribution

Chapter 4 and 6

Slide
1
 Overview

Experiments, Counting Rules,

and Assigning Probabilities
• Multi step experiment counting rules,
combinations, and permutations

Events and Their Probability

Probability Distributions

Slide
2
 Uncertainties

Managers often base their decisions on an analysis

of uncertainties such as the following:

What are the chances that 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?

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3
 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.

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4
 Probability as a Numerical Measure
of the Likelihood of Occurrence
Increasing Likelihood of Occurrence

0 . 1
Probability 5
:
The event The occurrence The event
is very of the event is is almost
unlikely just as likely as certain
to occur. it is unlikely. to occur.

Slide
5
Experiments, Counting Rules, and
Assigning Probabilities

Slide
6
 Statistical Experiments

In statistics, the notion of an experiment differs

somewhat from that of an experiment in the
physical sciences.

In statistical experiments, probability determines

outcomes.

Even though the experiment is repeated in exactly

the same way, an entirely different outcome may
occur.

For this reason, statistical experiments are some-

times called random experiments.

Slide
7
An Experiment and Its Sample Space

An experiment is any process that generates well-

defined outcomes.

The sample space for an experiment is the set of

all experimental outcomes.

An experimental outcome is also called a sample

point.

Slide
8
 An Experiment and Its Sample Space

Experiment Experiment Outcomes

Toss a coin Head, tail
Inspection a part Defective, non-defective
Conduct a sales call Purchase, no purchase
Roll a die 1, 2, 3, 4, 5, 6
Play a football game Win, lose, tie

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9
 An Experiment and Its Sample Space

 Example: Bradley Investments

Bradley has invested in two stocks, Markley
Oil
and Collins Mining. Bradley has determined
that the
possible outcomes of these investments three
months Investment Gain or Loss
from now are in
as 3follows.
Months (in $000)
Markley Oil Collins Mining
10 8
5 -2
0
-20

Slide
10
 A Counting Rule for
Multiple-Step Experiments
 If an experiment consists of a sequence of k steps
in which there are n1 possible results for the first st
n2 possible results for the second step, and so on,
then the total number of experimental outcomes is
given by (n1)(n2) . . . (nk).
 A helpful graphical representation of a multiple-step
experiment is a tree diagram.

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11
 A Counting Rule for
Multiple-Step Experiments
 Example: Bradley Investments
Bradley Investments can be viewed as a
two-step
experiment. It involves two stocks, each with a
set of
experimental outcomes.
Markley Oil: n1 = 4
Collins Mining: n2 = 2
Total Number of
Experimental Outcomes: n1n2 = (4)(2) = 8

Slide
12
 Tree Diagram
 Example: Bradley Investments
Markley Oil Collins Mining Experimental
(Stage 1) (Stage 2) Outcomes
Gain 8 (10, 8) Gain $18,0
(10, -2) Gain $8,0
Gain 10 Lose 2
Gain 8 (5, 8) Gain $13,000
(5, -2) Gain $3,0
Gain 5 Lose 2
Gain 8
(0, 8) Gain $8,0
Even
(0, -2) Lose $2,0
Lose 20 Lose 2
Gain 8 (-20, 8) Lose $12,0
Lose 2 (-20, -2) Lose $22,0

Slide
13
 Counting Rule for Combinations

 Number of Combinations of N Objects

Taken n at a Time
A second useful counting rule enables us to
count
the number of experimental outcomes when n
objects
are to be selected N
from
 a set
N ! of N objects.
N
Cn   
 n  n!(N  n)!

where: N! = N(N - 1)(N - 2) . . . (2)(1)

n! = n(n - 1)(n - 2) . . . (2)(1)
0! = 1

Slide
14
 Counting Rule for Permutations

 Number of Permutations of N Objects

Taken n at a Time
A third useful counting rule enables us to
count
the number of experimental outcomes when n
objects are to be selected from a set of N
objects,
where the orderN
of selection
 N Nis! important.
Pn n!  
 n  (N  n)!

where: N! = N(N - 1)(N - 2) . . . (2)(1)

n! = n(n - 1)(n - 2) . . . (2)(1)
0! = 1
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15
 Assigning Probabilities

 Basic Requirements for Assigning Probabilities

1. The probability assigned to each experimental

outcome must be between 0 and 1, inclusively.

0 < P(Ei) < 1 for all i

where:
Ei is the ith experimental outcome
and P(Ei) is its probability

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16
 Assigning Probabilities

 Basic Requirements for Assigning Probabilities

2. The sum of the probabilities for all experimenta

outcomes must equal 1.

P(E1) + P(E2) + . . . + P(En) = 1

where:
n is the number of experimental outcomes

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17
 Assigning Probabilities

Classical Method
Assigning probabilities based on the assumption
of equally likely outcomes

Relative Frequency Method

Assigning probabilities based on experimentation
or historical data

Subjective Method
Assigning probabilities based on judgment

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18
 Classical Method

 Example: Rolling a Die

If an experiment has n possible
outcomes, the
classical method would assign a probability
of 1/n
Experiment:
to Rolling a die
each outcome.
Sample Space: S = {1, 2, 3, 4, 5, 6}
Probabilities: Each sample point has a
1/6 chance of occurring

Slide
19
 Relative Frequency Method

 Example: Lucas Tool Rental

Lucas Tool Rental would like to assign
probabilities
to the number of car polishers it rents each day.

Office records show the following frequencies of

Number of Number
daily Polishers Rented of Days
rentals for the last
0 40 days. 4
1 6
2 18
3 10
4 2

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20
 Relative Frequency Method

 Example: Lucas Tool Rental

Each probability assignment is given by
dividing
the frequency (number of days) by the total
frequency
Numberof
(total number ofdays).
Number
Polishers Rented of Days Probability
0 4 .10
1 6 .15
2 18 .45 4/40
3 10 .25
4 2 .05
40 1.00
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21
 Subjective Method

 When economic conditions and a company’s

circumstances change rapidly it might be
inappropriate to assign probabilities based solely o
historical data.
 We can use any data available as well as our
experience and intuition, but ultimately a probabilit
value should express our degree of belief that the
experimental outcome will occur.
 The best probability estimates often are obtained b
combining the estimates from the classical or relat
frequency approach with the subjective estimate.

Slide
22
 Subjective Method

 Example: Bradley Investments

An analyst made the following probability
estimates.
Exper. Outcome Net Gain or Loss Probability
(10, 8) $18,000 Gain .20
(10, -2) $8,000 Gain .08
(5, 8) $13,000 Gain .16
(5, -2) $3,000 Gain .26
(0, 8) $8,000 Gain .10
(0, -2) $2,000 Loss .12
(-20, 8) $12,000 Loss .02
(-20, -2) $22,000 Loss .06

Slide
23
Events and Their Probability

Slide
24
 Events and Their Probabilities

An event is a collection of sample points.

The probability of any event is equal to the sum of

the probabilities of the sample points in the event.

If we can identify all the sample points of an

experiment and assign a probability to each, we
can compute the probability of an event.

Slide
25
 Events and Their Probabilities

 Example: Bradley Investments

Bradley has invested in two stocks, Markley
Oil
and Collins Mining. Bradley has determined
that the
possible outcomes of these investments three
months Investment Gain or Loss
from now are in
as 3follows.
Months (in $000)
Markley Oil Collins Mining
10 8
5 -2
0
-20

Slide
26
 Events and Their Probabilities

 Example: Bradley Investments

An analyst made the following probability
estimates.
Exper. Outcome Net Gain or Loss Probability
(10, 8) $18,000 Gain .20
(10, -2) $8,000 Gain .08
(5, 8) $13,000 Gain .16
(5, -2) $3,000 Gain .26
(0, 8) $8,000 Gain .10
(0, -2) $2,000 Loss .12
(-20, 8) $12,000 Loss .02
(-20, -2) $22,000 Loss .06

Slide
27
 Events and Their Probabilities

 Example: Bradley Investments

Event M = Markley Oil Profitable

M = {(10, 8), (10, -2), (5, 8), (5, -2)}
P(M) = P(10, 8) + P(10, -2) + P(5, 8) + P(5, -2)
= .20 + .08 + .16 + .26
= .70

Slide
28
 Events and Their Probabilities

 Example: Bradley Investments

Event C = Collins Mining Profitable

C = {(10, 8), (5, 8), (0, 8), (-20, 8)}
P(C) = P(10, 8) + P(5, 8) + P(0, 8) + P(-20, 8)
= .20 + .16 + .10 + .02
= .48

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29
Probability Distributions

Slide
30
 Probability Distributions

 Discrete Probability Distributions

• Binomial Probability Distribution
• Poisson Probability Distribution
• Hypergeometric Probability Distribution
 Continuous Probability Distributions
• Uniform Probability Distribution
• Normal Probability Distribution
• Exponential Probability Distribution

Slide
31
 Normal Probability Distribution

 Normal Probability Density Function

1  (x  )2 / 2 2
f (x)  e
 2

where:
 = mean
 = standard deviation
 = 3.14159
e = 2.71828

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32
 Normal Probability Distribution

 Characteristics

The distribution is symmetric; its skewness

measure is zero.

Slide
33
 Normal Probability Distribution

 Characteristics

The entire family of normal probability

distributions is defined by its mean m and its
standard deviation s .

Standard Deviation s

x
Mean m

Slide
34
 Normal Probability Distribution

 Characteristics

The highest point on the normal curve is at the

mean, which is also the median and mode.

Slide
35
 Normal Probability Distribution

 Characteristics

The mean can be any numerical value: negative,

zero, or positive.

x
-10 0 25

Slide
36
 Normal Probability Distribution

 Characteristics

The standard deviation determines the width of the

curve: larger values result in wider, flatter curves.

s = 15

s = 25

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37
 Normal Probability Distribution

 Characteristics

Probabilities for the normal random variable are

given by areas under the curve. The total area
under the curve is 1 (.5 to the left of the mean and
.5 to the right).

.5 .5
x

Slide
38
 Normal Probability Distribution

 Characteristics (basis for the empirical rule)

68.26% of values of a normal random variable

+/- 1 standard deviation
are within of its mean

95.44% of values of a normal random variable

are within+/- 2 standard deviations of its mean

99.72% of values of a normal random variable

are within +/- 3 standard deviations of its mean

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39
 Normal Probability Distribution

 Characteristics (basis for the empirical rule)

99.72%
95.44%
68.26%

m
x
m – 3s m – 1s m + 1s m + 3s
m – 2s m + 2s
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40
 Standard Normal Probability Distribution

 Characteristics

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.

Slide
41
 Standard Normal Probability Distribution

 Characteristics

The letter z is used to designate the standard

normal random variable.

s = 1

z
0

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42
 Standard Normal Probability Distribution

 Converting to the Standard Normal Distribution

x 
z


We can think of z as a measure of the number of

standard deviations x is from .

Slide
43
 Standard Normal Probability Distribution

 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 gallons, a replenishment
The store manager is concerned that sales
order is
are
placed.
being lost due to stockouts while waiting for a
replenishment order.

Slide
44
 Standard Normal Probability Distribution

 Example: Pep Zone

It has been determined that demand
during
replenishment lead-time is normally
distributed
with a mean of 15 gallons and a standard
The manager would like to know the
deviation
probability
of 6 gallons.
of a stockout during replenishment lead-time.
In
other words, what is the probability that
demand P(x > 20) = ?
during lead-time will exceed 20 gallons?
Slide
45
 Standard Normal Probability Distribution

 Solving for the Stockout Probability

Step 1: Convert x to the standard normal distributio

z = (x - )/
= (20 - 15)/6
= .83

Step 2: Find the area under the standard normal

curve to the left of z = .83.

see next slide

Slide
46
 Standard Normal Probability Distribution

 Cumulative Probability Table for

the Standard Normal Distribution
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
.5 .6915 .6950 .6985 .7019 .7054 .7088 .7123 .7157 .7190 .7224
.6 .7257 .7291 .7324 .7357 .7389 .7422 .7454 .7486 .7517 .7549
.7 .7580 .7611 .7642 .7673 .7704 .7734 .7764 .7794 .7823 .7852
.8 .7881 .7910 .7939 .7967 .7995 .8023 .8051 .8078 .8106 .8133
.9 .8159 .8186 .8212 .8238 .8264 .8289 .8315 .8340 .8365 .8389
. . . . . . . . . . .

P(z
< .83)
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47
 Standard Normal Probability Distribution

 Solving for the Stockout Probability

Step 3: Compute the area under the standard norm

curve to the right of z = .83.

P(z > .83) = 1 – P(z < .83)

= 1- .7967
= .2033

Probability
of a P(x >
stockout 20)

Slide
48
 Standard Normal Probability Distribution

 Solving for the Stockout Probability

Area = 1 - .7967
Area = .7967
= .2033

z
0 .83

Slide
49
 Standard Normal Probability Distribution

 Standard Normal Probability Distribution

If the manager of Pep Zone wants the
probability
of a stockout during replenishment lead-time
to be
no more than .05, what should the reorder
(Hint: Given a probability, we can use the
point be?
standard
normal table in an inverse fashion to find the
-------------------------------------------------------------
corresponding
-- z value.)

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50
 Standard Normal Probability Distribution

 Solving for the Reorder Point

Area = .9500

Area = .0500

z
0 z.05

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51
 Standard Normal Probability Distribution

 Solving for the Reorder Point

Step 1: Find the z-value that cuts off an area of .05

in the right tail of the standard normal
distribution.
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
1.5 .9332 .9345 .9357 .9370 .9382 .9394 .9406 .9418 .9429 .9441
1.6 .9452 .9463 .9474 .9484 .9495 .9505 .9515 .9525 .9535 .9545
1.7 .9554 .9564 .9573 .9582 .9591 .9599 .9608 .9616 .9625 .9633
1.8 .9641 .9649 .9656 .9664 .9671 .9678
We look up
.9686 .9693 .9699 .9706
the
1.9 .9713 .9719 .9726 .9732 .9738 .9744 .9750complement
.9756 .9761 .9767
. . . . . . . . of the
. tail. area.
(1 - .05 = .95)
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52
 Standard Normal Probability Distribution

 Solving for the Reorder Point

Step 2: Convert z.05 to the corresponding value of x

x =  + z.05
 = 15 + 1.645(6)
= 24.87 or 25

A reorder point of 25 gallons will place the probabili

of a stockout during leadtime at (slightly less than)

Slide
53
 Normal Probability Distribution

 Solving for the Reorder Point

Probability of
Probability of
no
a
stockout
stockout
during
during
replenishment
replenishment
lead-time
lead-time
= .95
= .05

x
15 24.87

Slide
54
 Standard Normal Probability Distribution

 Solving for the Reorder Point

By raising the reorder point from 20 gallons to
25 gallons on hand, the probability of a stockout
decreases from about .20 to .05.
This is a significant decrease in the chance that
Pep Zone will be out of stock and unable to meet a
customer’s desire to make a purchase.

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55