Attachment

Business Statistics
Unit 3
Prof. S R Prasad
Prof. S R Prasad: MBA 015:

1
Business Statistics
Probability
• It is a concept which mathematically measures the
degree of uncertainty and therefore certainty of
occurrence of an event.
• It has its origin in game of chance e.g. gambling.
• It has commercial use in insurance, quality control
and assurance.
• It is an essential tool in ‘statistical inference’ and
forms basis for ‘Decision Theory’.
Prof. S R Prasad: MBA 015: Business

2
Statistics
Probability: Terminology
• Random Experiment
– Experiments conducted under identical conditions, the outcome
is not unique but may be any possible outcome.
• Equally Likely Events
– If any of two or more events cannot be expected to occur in
preference to others
• Mutually Exclusive Events
– Occurrence of one implies that the other cannot happen
• Favorable and Unfavorable cases
– Outcome of an experiment which are favorable to an event of
our interest is called favorable cases. All other outcomes are
called unfavorable events.

3
Statistics
Probability: Terminology
• Simple events
– If it corresponds to a single possible outcome
• e.g. in a single toss of coin the event of getting head is a simple event
• Compound or joint events
– Joint occurrence of two or more events
• e.g. in tossing of two coins the event of getting ‘at least one head’
– Independent events
• Two or more events occur in such a way that the occurrence of one does
not affect the occurrence of other
– Dependent events
• Occurrence of one event influences the occurrence of other, then second
event is called dependent event

4
Statistics
Probability: Definitions
• Mathematical, classical or a-priori
• Statistical, empirical or a-posteriori
• Axiomatic approach

5
Statistics
• Mathematical, classical or a-priori
– If there are n exhaustive, mutually exclusive and
equally likely cases and m of them are favorable to
occurrence of an event A, then probability of
occurring of event A is
P( A)  m
n  favorable _ cases
exhaustive _ cases
P( A)  nm
n  unfavorable _ cases
exhaustive _ cases
P( A)  1  P( A)
6
Statistics
Probability: Characteristics
• Probability of an event is the ratio of the number of favorable
cases to the exhaustive number of cases of the trial.
• Since 0 ≤ m ≤ n, probability is a positive quantity.
• Probability of an impossible event is zero.
• Probability of a sure event is 1 and therefore probability of an
event rages between 0 and 1.
• Sum of probability of happening or non-happening of an event is
always equal to 1
P( A)  P( A)  1
7
Statistics
Probability: Example
• Odds are 2 to 3 in favor of India winning ODI against Australia.
– Exhaustive events: 5
– Favorable cases: 2
– Unfavorable cases: 3
– P(A)= 2/5
– 1- P(A)= 3/5

8
Statistics
• Statistical, empirical or a-posteriori
– If (m/n) is the relative frequency of an event A
connected with a random experiment, then the
limiting value of the ratio m/n as n increases
infinitely is called the probability of the event A.
– Symbolically
m
P( A)  lim
n  n

9
Statistics
– Consider a coin being tossed 10 times resulting in 6
heads ad 4 tails. The relative frequency of head is
6/10= 0.6. However, if the experiment is carried out
infinite number of times the relative frequency of
head will become 0.5.
– Conclusion: though the results of an individual
experiment is unpredictable, the average results of a
long sequence of a random experiments show
striking regularity and are somewhat predictable.

10
Statistics
Set Theory
– Sets and Elements
• A well defined list or collection of objects is called ‘set’ and each
object in a set is called ‘element’.
• Set is denoted by capital letters A,B, X or Y
• Elements are denoted by small letters a, b, x or y.
• Thus A=(1,2,3,4) or B=(a, b, c,d) are description of sets together with
elements of the sets.
• Notation means “is an element of” and  means “is not an
element of”
– Equal or identical sets
• If two sets A and B have all elements common then they are called
equal sets. Symbolically A=B.
• A= (2,4,8); B= (2,4,8); X= (2,2,4,8); Y= (1,2,3,4,8)
• Then A=B=X≠Y

11
Statistics
Set Theory
– Null or Empty Set
• A set that contains no elements is called Null or Empty set.
• Symbolically it is written as Ø
• In a die casting experiment, the set A, of number greater than 7
is a null or empty set.
– Subset and Proper subset
• If every element of set A is also an element of set B then A is
subset of B.
• Symbolically
• If and A≠B then A is called proper subset.
A B
A B
12
Statistics
Set Operations
– Intersection of two sets
• Intersection of two sets A & B is the set of elements that are common
to both A & B.
• A= (1,2,3,4,5,6); B= (5.6.7.8.9) then intersection of A & B will be
• X= (3,3,4,5,2); Y= (6,7,1,7,6) then Ø
A  B  {5,6}
– Disjoint Sets
• If Ø then A & B are disjoint sets X Y 
– Union of two sets
A ofBsets
• Union  A & B is the set of elements that belongs to both the
sets.
• A= (2,3,8,5); B= (8,6,3,4) then
A  B  ( 2,3,4,5,6,8)

13
Statistics
Set Operations
• Compliment of a set
– If a set A is a subset of the universal set U, then
compliment of A will be set of all elements not
part of A. Compliment is symbolized as A’.
– U= (1,2,3,4,5,6,7,8,9); A= (1,2,3,4,5) then
A’= (6,7,8,9)

14
Statistics
Set Operations
• Compliment of a set
– If a set A is a subset of the universal set U, then
compliment of A will be set of all elements not
part of A. Compliment is symbolized as A’.
– U= (1,2,3,4,5,6,7,8,9); A= (1,2,3,4,5) then
A’= (6,7,8,9)

15
Statistics
Counting of Complex Events
• Rule 1
– If an event can take place in m ways and another
event can take place in n ways then both the events
can take place in m*n ways.
• In throwing two dices each can land in 6 ways. So the pair
of dice can land in 6*6 = 36 ways.
• If there are 3 candidates for president and 4 for vice
president the two positions can be filled in 3*4= 12 ways.

16
Statistics
Counting of Complex Events
• Rule 2
– If an event A can take place in m ways and another
event B can take place in n ways and A & B are
mutually exclusive then both the events can take
place in m+n ways.
• In a bag there are 6 red and 4 white socks. The number of
ways in which socks can be picked so that they are either red
or white is 6+4= 10
• If there are 3 females and 4 males are candidates for
president. The number of ways either a male or female
president can be chosen is 3+4= 7 ways.

17
Statistics
Factorial
• Factorial represents product of n consecutive
integers.
– n*(n-1)*(n-2)*……….3*2*1= n!
– n! is called n factorial.
– 1!= 0!= 1

18
Statistics
Permutation
• Permutation is arrangement of all or part of
elements of a set.
• Permutation of n objects is n!
• A= (a,b,c)
– Number of arrangements possible is 3!= 6
– abc, acb, bac, bca, cab, cba

19
Statistics
Combination
• Combination of n items taken r at a time is selection of r
items out of n items without any attention to
arrangements.
n!
Cr 
n
r! ( n  r )!of 3 has to be formed

• From 5 boys and 6 girls, a committee
consisting of 2 boys and 1 girl.
(ways 2 boys can be selected )
5
C2  2!( 5(ways1
5!
2 )!  10girl can be selected)
6
C 
Using rule
1
6!
11!( 6the 6
1)! committee can be formed in 10*6= 60 ways.

20
Statistics
Axiomatic Approach to Probability
• This approach relates theory of probability with
modern theories of function and set theory.
• This approach was proposed by Russian
mathematician A. N. Kolmogorov in 1933.
• It includes classical and statistical definitions
and also overcomes the limitations of each
definitions.

21
Statistics
Axiomatic Approach Terms
• Random Experiment
– Any operation that results in two or more outcome
is called an experiment. Experiments can be
repeated under similar conditions and result of an
individual experiment is unpredictable
• Observing number of accidents in a town
• Recording of whole sale price of a commodity
• Noting daily temperatures of a city

22
Statistics
• Sample space
– Set S of all possible outcomes in a experiment is
called ‘sample space’. Each element of sample space
is called ‘sample point’
• In tossing of a fair coin, there are two possible outcomes,
namely head (H) and tail (T). Thus S= (H,T).
• In tossing of two coins the S= (HH, HT, TH, TT)
• If two children are selected from a group of 3 boys and 2
girls S= (B1B2, B1B3, B1G1, B1G2, B2B3, B2G1, B2G2,
B3G1, B3G2, G1G2)

23
Statistics
• Event
– Any subset of the sample space is called an event
• In a single throw of dice, event of getting 6 is given by E= 6.
• Ø E Ø Sis an event called impossible event
,so
•
S , so S is an event called sure event
– Simple
S orS Elementary Event
• An event containing only a single sample point.
– In single coin toss experiment S= (H,T); A=(T)
– In two coins toss experiment each of (HH), (HT), (TH), (TT) is a simple
event

24
Statistics
• Compound or composite or mixed event
• An event containing two or more sample point.
– In dice toss experiment S= (1,2,3,4,5,6); A=(2,4,6); A is an event of
‘getting even numbers’
– In dice toss experiment S= (1,2,3,4,5,6); A=(5,6); A is an event of
‘getting number more than 4’
– Mutually exclusive event
• Two subsets A & B of a sample space S are disjointed
• A= (1,2); B(6): =Ø
– Complimentary eventA B
• When then . A’ is complimentary of A
A S A'  S

25
Statistics
Axiomatic Approach Axioms
1. Probability of an event ranges from 0 to 1.
– 0≤ P ≤ 1
2. Probability of entire sample space is 1.
– P(S)= 1
– P(S)= p1+p2+p3+………….+pn= 1
– In a bag there are 4 red, 3 black, 5 white balls. Probability of its
being red, white or black shall be 1/3, ¼, 5/12 respectively.
Sum of three is 1.
3. If two events A & B are mutually exclusive events then
probability of occurrence of either A or B is
– = P(A)+ P(B)
• P( A are
These B) axioms of positiveness, certainty and unity

26
Statistics
Probability Theorem: Addition Theorem
1. If two events A & B are mutually exclusive and

probability of occurrence of A is (PA) and of B is
P(B), then probability of occurrence of any event
(A or B) will be sum of individual probabilities of
A & B.
– P(A or B)= P(A)+ P(B)
2. If A & B are not mutually exclusive then
– P(A or B)= P(A)+ P(B)- P(A & B)

27
Statistics
Probability
• What is the probability of getting 2 or 4 in throw of
dice?
– 1/6+1/6= 2/6
• What is the probability of drawing queen or card of
heart?
– 4/52+13/52-1/52= 4/13
• What is the probability of drawing a picture card?
– 4/52+4/52+4/52= 12/52
• What is the probability of drawing a card of club or
ace of diamond?

28
Statistics
Probability Theorem: Multiplication Theorem
“Theorem of Compound Probability

If two events are mutually independent, and the
probability of occurrence of one is P(A) and of
the other P(B), then the probability of
occurrence of both the events is product of P(A)
& P(B).
P(A & B)= P(A)* P(B)

29
Statistics
Probability
• A bag contains 5 white and 7 black balls. A ball is drawn and
replaced and then a ball is drawn again. What is the
probability that
– Both the balls are white?
• 5/12*5/12= 25/144
– Both of them are black?
– First ball is white and second one is black?
• 5/12*7/12= 35/144
– First is black and second is white?
– Both are of same color?
• 25/144+49/144= 74/144
– Both are of different color?
• (7/12*5/12)+ (5/12*7/12)= 35/144+35/144= 70/144

30
Statistics
Inverse Probability or Baye’s Theorem
• In simple probability, the probability is

calculated before the event.
• In inverse probability, it is calculated for the
cause of the event after the event.
– E.g. One bag contains 4 red and 2 black balls and
another one contains 3 red and 3 black balls
• What is the probability of a ball being black?
• What is the probability of it being drawn from 1st bag?

31
Statistics
Inverse Probability or Baye’s Theorem
• Occurrence of an event can be influenced by

various but mutually exclusive reasons.
– If there are n mutually exclusive reasons and
probability of influence of these reasons are P1, P2,
P3…………Pn and probability of happening of events
by each reason is p1, p2, p3……..pn then probability
of event due to mth reason is
Pm pm
P
P1 p1  P2 p2  .......Pn pn
32
Statistics
Inverse Probability
• There are three urns. Urn 1 contains 3 white
and 7 black balls, Urn 2 contains 5 white and 3
black balls and Urn 3 contains8 white and 4
black balls. A white ball was drawn from these
three Urns. What is the probability it was
drawn from Urn 1?
1
* 103 1
3
 10
 191
36
13 * 103    * 85   13 * 128 
1
3
191
360

33
Statistics
Theoretical Probability Distribution
• It is a distribution of frequencies constructed
through expected frequencies obtained by
mathematical computation based on certain
hypothesis.
• These are also referred to as ‘Expected or
Probability or Model Frequency Distribution’.

34
Statistics
Types of Probability Distribution
Distribution
Discrete Continuous
Binomial Poisson Normal

35
Statistics
Utility of Probability Distribution
• Estimate of nature and trend of frequency
distribution.
• Basis of logical decision.
• Forecasting.
• Substitute for actual data.
• Test of sampling
• Solution to various problems in daily life/
business

36
Statistics
Binomial Distribution
• It is a discrete frequency distribution
• The probability distribution function is
expressed as
n x x
– P 
p= probability( xof
n
C
) success
x q p
– q= probability of failure
– n= number of trials
– x= number of successes in n trials

37
Statistics
• Conditions for application
– Finite number of trials
– Mutually exclusive outcomes
– Same probability in each trial
– All trials independent
– Discrete variables

38
Statistics
• Characteristics
– Theoretical probability distribution
– Discrete probability distribution
– p & q are main parameters of binomial distribution
– Expansion of (p+q)n will provide expected probability
– N (p+q)n will give expected frequency
– Mean= np
– S.D.=
– μ1 = 0 npq
– μ2 = npq
– μ3 = npq(q-p)
– μ4 = 3n2p2q2+ npq(1-6pq)

39
Statistics
• 4 coins are tossed 160 times. Probability of getting
head or tail is equal. Find the expected frequency.
N= 160, p= ½, q= ½ , n=4
Expected frequency= 160(1/2 + ½)4
= 160(q4+4p1q3+ 6p2q2+ 4p3q1+ p4)
= 160(1/16+4*1/16+ 6*1/16+ 4*1/16+ 1/16)
= 10+ 40+ 60+ 40+ 10
No. of success: 0 1 2 3 4
Expected f: 10 40 60 40 10

40
Statistics
• 10 coins are tossed 100 times. The probability of getting
head or tail is p= q=1/2. Find out expected frequencies of:
– 7 heads & 3 tails; at least 7 heads; exactly 6 heads
7 heads & 3 tails
Expected
10 1 3
2 ) 
C7 ( 12 )7 ( Frequency=
3*2*1 * 1
128 * 1
8 
10*9*8 100*120/1024=
120
1024
11.72=12
At least 7 heads
P= 7(H)+8(H)+9(H)+10(H)= 176/1024
Expected frequency= 100*176/1024= 17.18= 17
Exactly 6 heads

41
Statistics
• Probability of bomb hitting a target is 1/5. Two
bombs are enough to destroy the target. 6
bombs are thrown. Find out the probability of
destruction of the target.
P0  6C0 ( 54 )6 ( 15 )0  15625
4096
Probability6 of target getting destroyed is

P1  C1 ( 5 ) ( 5 )  15625
4 5 1 1 6144
1-(4096/15625+ 6144/15625)= .3446

42
Statistics
Poisson Distribution
• It is a discrete probability distribution
• It is used when p is very small i.e. p→0 and n is large.
• It is used to describe the behavior of rare events, e.g.
– germs in a drop of water,
– number of errors in a printed sheet,
– number of telephone calls per minute to a switch board.
• It is used to describe infrequently occurring events
– with respect to time (temporal distribution)
– with respect to space (spatial distribution)
– with respect to volume etc.

43
Statistics
Poisson Distribution: Applications
1. Insurance: number of casualties
2. Deaths due to suicide
3. Number of bacteria in a sample
4. Quality control: number of defects per item
5. Waiting time problems: arrival of customers
6. Physics: number of particles emitted from
radio active substance

44
Statistics
• Px = Probability of success
• x= number of successes 0, 1, 2, 3……….n
• e= 2.7183
• m= arithmetic mean of observed data
x
m m
• Px frequency=
Expected e
x! m
N ( pn 1 ) *
n

45
Statistics
1. Arithmetic mean= m= np
2. Standard Deviation= √m= √np
3. μ1 = 0
4. μ2 = m
5. μ3 = m
6. μ4 = m+ 3m2
7.
  m 2 1
8. 1  3  3 
2 m m
9.
10.   m  3m 2
1
4
  3 
2 
2 2
m m
1
 1  1 
m 1 1
 2  2  3  3  3
m m

46
Statistics
• Conditions for application
– Occurrence or non-occurrence of an event does not
influence other events
– Probability of occurrence of more than one event in
very small interval is negligible
– Probability of success for a small space or short
interval of time is proportional to the space or
length of time interval
– Discrete variables

47
Statistics
• A manufactured product has 2 defects per unit
of product inspected. What is the probability of
finding a product
– without any defect?
– With 3 defects?
– With 4 defects?
Average= m= 2
2 20 1
P0  e  0.135 *  0.135  13.5%
0! 1
48
Statistics
• A plant has 4 industrial accidents in a month on an average.
What is the probability of less than 3 accidents in a month?
Average= m= 4
0
4 4 1
P0  e  0.018 *  0.018  1.8%
0! 1
1
4 4 4
P1  e  0.018 *  0.072  7.2%
1! 1
4 42 16
P2  e 23.4%
Total=  0.018 *  0.144  14.4%
2! 2

49
Statistics
• In a radio manufacturing plant, average number of
defectives is 1 out of 10 random samples? What is the
probability of getting two defectives
– Using Binomial distribution?
– Using Poisson distribution?
p= 1/10, q= 9/1
P2  C ( ) ( )  0.194
10 1 2 9 8
2 10 10
Average= m= 1
2
1 1 1
P2  e  0.368 *  0.184  1.84%
2! 2 Prof. S R Prasad: MBA 015: Business
50
Statistics
Normal Distribution
• It is a continuous probability distribution
• Relative frequencies of continuous variables are
distributed as per normal probability law.
• It is a symmetrical distribution where
frequencies are distributed evenly about mean
of distribution.
• It is most widely used distribution for around
our life.

51
Statistics
Normal Distribution
• Normal distribution has following probability
density function:
1  12 ( x ) 2
Px 
 2
e   x 
1
Px  e
 12 Z 2
  Z 
 2
x
S .N .V .  Z  (S.N.V. = Standard Normal Variate)
 Mean of Z= 0 and S.D. = 1
52
Statistics
Normal Distribution
• Assumptions for Normal Distribution
1. Independent Causes
2. Multiple Causation
3. Symmetrical

53
Statistics
Normal Distribution
• Applications of Normal Distribution
1. Universality
2. Study of Natural Phenomena
3. Conformity to Sampling Distribution
4. Basis for Small Samples
5. Statistical Quality Control
6. Determination of Limits of Population Values

54
Statistics
Normal Distribution
THE
NORMAL
LAW OF ERROR
STANDS OUT IN THE
EXPERIENCE OF MANKIND
AS ONE OF THE BROADEST
GENERALIZATION OF NATURAL
PHILOSOPHY. IT SERVES AS THE
GUIDING INSTRUMENT IN RESEARCHES
IN THE PHYSICAL AND SOCIAL SCIENECES AND
IN MEDICINE, AGRICULTURE AND ENGINEERING.
IT IS AN INDISPENSABLE TOOL FOR THE ANALYSIS AND THE
INTERPRETATION OF THE BASIC DATA OBTAINED BY OBSERVATION AND EXPERIMENT.

55
Statistics
Normal Distribution
X
X
XXX
X XXXX
X X XX X X X X
X X X XX X X X X X
X X X X X X X X X X X X XX X
Target

56
Statistics
Normal Distribution
• Properties of Normal Distribution
1. Bell Shaped
2. Continuous Distribution
3. Equality of Central Values
4. Uni- Apex
5. Equal distance of Quartiles from Median
6. Asymptotic to Base Line
7. Parameters of Distribution are Mean & S.D.

57
Statistics
Normal Distribution
• Properties of Normal Distribution
8 Quartile Deviation (Q.D.)= 2/3 S.D.
9 M.D.= 4/5 S.D.
10 Q.D.= Probable Error (P.E.)
11 P.E.= 5/6 M.D.

58
Statistics
Normal Distribution
1. Arithmetic mean= µ
2. Standard Deviation= σ
3. μ1 = 0
4. μ2 = σ2
5. μ3 = 0
6. μ4 = 3µ22
7.
 
8. 1  3  0
2
4
2 
 2

59
Statistics
Normal Distribution
• Average daily sales from 500 branches is
Rs. 150,000/- with S.D. of Rs. 15,000/-. How
many branches have sales between
Rs. 120,000/- & Rs. 145, 000/-?
X1   120,000  150,000
Z1    2
 15,000
X2   145,000  150,000
Z2    0.33
 15,000
Area from Mean to -2= 0.4772

Area from mean to -.33= 0.1293
Total area from 120,000 t0 145, 000= 0.4772- 0.1293= 0.3479
No. of branches= 500* 0.3479=174
62
Statistics
Normal Distribution
• In a normal distribution 7% of items have
value less than 35 and 89% of items have
value less than 63. Find mean and S.D.
X1   35  
Z1  1.48  
 
  1.48  35
  1.23  63
.43
  50.3 .39
  10.33

7 60 89 63
Statistics

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Business Statistics

Prof. S R Prasad: MBA 015:

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

r! ( n  r )!of 3 has to be formed

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

1. If two events A & B are mutually exclusive and

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

“Theorem of Compound Probability

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

• In simple probability, the probability is

Prof. S R Prasad: MBA 015: Business

• Occurrence of an event can be influenced by

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Binomial Poisson Normal

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Probability6 of target getting destroyed is

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Prof. S R Prasad: MBA 015: Business

Area from Mean to -2= 0.4772

Prof. S R Prasad: MBA 015: Business