INTRODUCTION TO BUSINESS STATISTICS

ELEMENTS OF PROBABILITY

PROBABILITY

Probability is a very popular concept in business management and social studies. This is
because it covers the risks which may be involved in certain business and social situations . It is
a fact that when a business investment is being arranged, the outcome is usually uncertain.
Therefore the concept of probability may be used to describe the degree of uncertainty of a
particular business outcome

Probability may therefore be defied as the chances of a given event occurring. Numerically,
probability values range between 0 and 1. a probability of 0 implies that the event cannot occur
at all. A probability of 1 implies that the event will certainly occur.

Therefore other events have their probabilities with values lying between 0 and 1

The formular used to determine probability is as follow

r Favourable outcomes
Probability (x) = =
n Total outcomes

Application of Probability in Business

1. Business games of chance e.g. Raffles Lotteries e.t.c.
2. Insurance firms: this is usually done when a new client or property is being insured. The
company has to be certain about the chances of the insured risks occurring.
3. Business decision making regarding viability of projects thus the projects with a greater
probability has greater chances.

Example
A bag contains 80 balls of which 20 are red, 25 are blue and 35 are white. A ball is picked at
random what is the probability that the ball picked is:
(i) Red ball
(ii) Black ball
(iii) Red or Blue ball.

Solution
Number of red balls in the bag
(i) Probability of a red ball = = P(R )
Total number of balls in the bag

20 1
= =
80 4

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 Number of black balls in the bag
(ii) Probability of black ball = = P(B)
Total number of balls
0
= =0
80
20 25 20 25
(iii) P(R or B) = or = +
80 80 80 80
9
=
16
Note: in probability or is replaced by a plus (+) sign. See addition rule.

Common terms
Events: an event is a possible outcome of an experiment or a result of a trial or an observation.

Mutually exclusive events

A set of events is said to be mutually exclusive if the occurance of any one of the events
precludes the occurrence of any of the other events e.g. when tossing a coin, the events are a
head or a tail these are said to be mutually exclusive since the occurrence of heads for instance
implies that tails cannot and has not occurred.

It can be represented in Venn diagram as.

E1 E2

E1  E2 = Ø

Non-mutually exclusive events

(independent events)
E1 E2

E1  E2 ≠ Ø

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Consider a survey in which a random sample of registered voters is selected. For each voter
selected their sex and political party affiliation are noted. The events “KANU” and “woman” are
not mutually exclusive because the selection of KANU does not preclude the possibly that the
voter is also a woman.

Independent Events
Events are said to be independent when the occurrence of any of the events does not affect the
occurrence of the other(s). e.g. the outcome of tossing a coin is independent of the outcome of
the preceding or succeeding toss.

Rules of Probability
(a) Additional Rule – This rule is used to calculate the probability of two or more mutually
exclusive events. In such circumstances the probability of the separate events must be
added.

Example
What is the probability of throwing a 3 or a 6 with a throw of a die?

Solution

P(throwing a 3 or a 6) = 1 + 1 = 1
6 6 3

(b) Multiplicative rule

This is used when there is a string of independent events for which individual probability
is known and it is required to know the overall probability.

Example
What is the probability of a 3 and a 6 with two throws of a die?

Solution
P(throwing a 3) and P(6)

= P(3) and P(6) = 1  1 = 1

6 6 36

Note: 1) In probability ‘and’ is replaced by ‘x’ – multiplication.

2) P(x) and P(y) ≠ P(x and y) note that these two are different. The first
implies P(x) happening and P(y), but if the order of which happened first is
unimportant then we have p(x and y).
In the example above:

P(3) and P(6) = 1

36

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 but
P(3 and 6) = P(3 followed by 6) or P(6 followed by 3)
= [P(3) P(6)] or [P(6) P(3)]

= 1 +1 = 1
36 36 18
(c) Conditional probability
This is the probability associated with combinations of events but given that some prior
result has already been achieved with one of them.
Its expressed in the form of
P(x|y) = Probability of x given that y has already occurred.
P ( xy)
P(x|y) = → conditional probability formula.
P( y )
Example:
In a competitive examination. 30 candidates are to be selected. In all 600 candidates appear in a
written test, and 100 will be called for the interview.
(i) What is the probability that a person will be called for the interview?
(ii) Determine the probability of a person getting selected if he has been called for the
interview?
(iii) Probability that person is called for the interview and is selected?

Solution:
Let event A be that the person is called for the interview and event B that he is selected.

100
(i)  P(A) = = 1
600 6

30 3
(ii) P(B|A) = =
100 10
(iii) P(AB) = P(A) × P(B|A)

= 1 3 = 3 = 1
6 10 60 20

Example:
From past experience a machine is known to be set up correctly on 90% of occasions. If the
machine is set up correctly then 95% of good parts are expected but if the machine is not set up
correctly then the probability of a good part is only 30%.
On a particular day the machine is set up and the first component produced and found to be
good. What is the probability that the machine is set up correctly.

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Solution:
This is displayed in the form of a probability tree or diagram as follows:

CS GP
GP = 0.95 CS – Correct Setting

CS = 0.9 BP = 0.05
CS BP IS – Incorrect Setting

IS = 0.1 GP = 0.3 IS GP
GP – Good Product
BP = 0.7

IS BP BP – Bad Product

P(CSGP) = 0.9 × 0.95 = 0.855

P(CSBP) = 0.9 × 0.05 = 0.045
P(ISGP) = 0.1 × 0.3 = 0.03
P(ISBP) = 0.1 × 0.7 = 0.07
1.00

- Probability of getting a good part (GP) = CSGP or ISGP

= CSGP + ISGP
= 0.855 + 0.03 = 0.885

Note: Good parts may be produced when the machine is correctly set up and also when its
incorrectly setup. In 1000 trials, 855 occasions when its correctly setup and good parts
produced (CSGP) and 30 occasions when its incorrectly setup and good parts produced (ISGP).

- Probability that the machine is correctly set up after getting a good part.
Number of favourable outcomes P(CSGP) 0.855
= = = = 0.966
Total possible outcomes P(GP) 0.885
Or
P(CSGP) 0.855
= P(CS|GP) = = = 0.966
P(GP) 0.885

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Example
In a class of 100 students, 36 are male and studying accounting, 9 are male but not studying
accounting, 42 are female and studying accounting, 13 are female and are not studying
accounting.
Use these data to deduce probabilities concerning a student drawn at random.

Solution:
Accounting A Not accounting Total

A
Male M 36 9 45
Female F 42 13 55
Total 78 22 100

45
P(M) = = 0.45
100
55
P(F) = = 0.55
100
78
P(A) = = 0.78
100

()
P A =
22
100
= 0.22

36
P(M and A) = P(A and M) = = 0.36
100
P(M and A ) = 0.09

P(F and A ) = 0.13

These probabilities can be express differently as;

P(M) = P(M and A) or P(M and A )

= 0.36 + 0.09 = 0.45

P(F) = P(F and A) or P(F and A )

= 0.42 + 0.13 = 0.55

P(A) = P(A and M) + P(A and F) = 0.36 + 0.42 = 0.78

()
P A = P( A and M) + P( A and F) = 0.09 + 0.13 = 0.22

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Now calculate the probability that a student is studying accounting given that he is male.
This is a conditional probability given as P(A|M)
P(A and M) 0.36
P(A|M) = = = 0.80
P(M) 0.45

From the formula above we get that,

P(A and M) = P(M) P(A|M) ……………….. (i)
Note that P(A|M) ≠ P(M|A)

P(A and M )
Since P(M|A) = this is known as the Bayes’ rule.
P(A)

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BAYES’ RULE/THEOREM

This rule or theorem is given by

P(A|B) =
( )
P(A )  P B A
P(B)
It’s used frequently in decision making where information is given the in form of conditional
probabilities and the reverse of these probabilities must be found.

Example
Analysis of questionnaire completed by holiday makers showed that 0.75 classified their holiday
as good at Malindi. The probability of hot weather in the resort is 0.6. If the probability of
regarding holiday as good given hot weather is 0.9, what is the probability that there was hot
weather if a holiday maker considers his holiday good?

Solution

( )
P(A )  P B A
P(A|B) =
P(B)

Let H = hot weather

G = Good
P(G) = 0.75 P(H) = 0.6 and P(G|H) = 0.9 (Probability of regard holiday as good
given hot weather)

Now the question requires us to get

P(H|G) = Probability of (there was) hot weather given that the holiday has been rated as
good).

(
P(H )P G H )= (0.6)(0.9)
=
P(G) 0.75
= 0.72.

Worked examples on probability

1. A machine comprises of 3 transformers A, B and C. The machine may operate if at least 2
transformers are working. The probability of each transformer working are given as shown
below;
P(A) = 0.6, P(B) = 0.5, P(C) = 0.7
A mechanical engineer went to inspect the working conditions of those transformers. Find the
probabilities of having the following outcomes

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 i. Only one transformer operating
ii. Two transformers are operating
iii. All three transformers are operating
iv. None is operating
v. At least 2 are operating
vi. At most 2 are operating

Solution

P(A) =0.6 P( A ) = 0.4 P(B) = 0.5 P(~B) = 0.5

P(C) = 0.7 P( C ) = 0.3

i. P(only one transformer is operating) is given by the following possibilities

1st 2nd 3rd

P (A B C) = 0.6 x 0.5 x 0.3 = 0.09

P (A B C) = 0.4 x 0.5 x 0.3 = 0.06

P (A B C) = 0.4 x 0.5 x 0.7 = 0.14

∴ P(Only one transformer working)

= 0.09 + 0.06 + 0.14 = 0.29

ii. P(only two transformers are operating) is given by the following possibilities.
1st 2nd 3rd

P (A B C) = 0.6 x 0.5 x 0.3 = 0.09

P (A B C) = 0.6 x 0.5 x 0.7 = 0.21

P (A B C) = 0.4 x 0.5 x 0.7 = 0.14

∴ P(Only two transformers are operating)

= 0.09 + 0.21 + 0.14 = 0.44

iii. P(all the three transformers are operating).

= P(A) x P(B) x P(C)

= 0.6 x 0.5 x 0.7

= 0.21

iv. P(none of the transformers is operating).

= P( A ) x P( B ) x P( C )

= 0.4 x 0.5 x 0.3

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 = 0.06

v. P(at least 2 working).

= P(exactly 2 working) + P(all three working)

= 0.44 + 0.21

= 0.65

vi. P(at most 2 working).

= P(Zero working) + P(one working) + P(two working)
= 0.06 + 0.29 + 0.44
= 0.79

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