Quantitative Techniques

(COQT111)

Unit 3

Foundation of Statistical
Inference

1
Table of Contents
Unit Overview ....................................................................................................................... 3
1. Basic Probability Concepts ................................................................................... 4
2. Probability Distributions ..................................................................................... 19
3. Unit Summary ...................................................................................................... 24
4. References ............................................................................................................ 24

2
Unit Overview
Suppose a company questions 200 customers in order to estimate the proportion of all
customers who favour a particular product. In this context, it would be expected that the
proportion of the 200 customers in the survey in favour of the product is a representative of
all customers who are in favour. There is a degree of uncertainty associated with any survey
results. A determination of the likelihood that a certain proportion of the customers in the
survey would favor the company product is of great importance in management-related
decision-making. The task of calculating the likelihood that something occurs belongs to the
realm of probability, which is the focus in this unit.

Learning Outcomes

By the end of this unit, you should be able to:

• Calculate probabilities using contingency tables.

• Calculate probabilities using both the Poisson and Binomial formulas, applying
different techniques especially cumulative probabilities.

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1. Basic Probability Concepts

It is important to understand the terminologies commonly used when studying probability.

The most common and basic terminologies relating to probability are defined below:

• Probability is defined as the likelihood (or chance) that a particular event will occur
• An experiment is a process by which an outcome is obtained (i.e., rolling a dice)
• The result of an experiment is called an outcome (i.e. obtaining a 2 after rolling a dice)
• An event is any particular outcome or group of outcomes (i.e. obtaining {Head}, or
{Tail} or {Head; Tail} after tossing a fair coin)
• The sample space is the set of all possible outcomes of a random variable (i.e. after
rolling a dice, all possible outcomes are given by {1; 2; 3; 4; 5; 6})

Mathematically, a probability is defined as the ratio of two numbers:

𝑟
𝑃(𝐴) =
𝑛
Where: 𝐴 = 𝑒𝑣𝑒𝑛𝑡 𝑜𝑓 𝑎 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑡𝑦𝑝𝑒

𝑟 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑐𝑜𝑚𝑒𝑠 𝑜𝑓 𝑒𝑣𝑒𝑛𝑡 𝐴

𝑛 = 𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑎𝑙𝑙 𝑝𝑜𝑠𝑠𝑖𝑏𝑙𝑒 𝑜𝑢𝑡𝑐𝑜𝑚𝑒𝑠 (𝑐𝑎𝑙𝑙𝑒𝑑 𝑠𝑎𝑚𝑝𝑙𝑒 𝑠𝑝𝑎𝑐𝑒)

𝑃(𝐴) = 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑎𝑛 𝑒𝑣𝑒𝑛𝑡 𝐴 𝑜𝑐𝑐𝑢𝑟𝑖𝑛𝑔

Probability values are always defined on a scale from 0 to 1 (or an interval (0 ≤ 𝑃(𝐴) ≤ 1). A
probability of zero (or near zero) indicates that an event is unlikely to occur, and a probability
of 1 (or close to 1) indicates that an event is certain to occur. Other probability values between
0 and 1 represent degrees of likelihood that an event will occur. An illustration of the scale
where the probability is defined is given in Figure 17.

Figure 17: Probability scale (adapted from Anderson et al., 2011)

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1.1. Types of Probability

There are two types of probabilities namely: subjective and objective probabilities. Subjective
probability is assigned based on personal feelings or insights. The determination of the
probability comes from an educated guess, expert opinion or just plain intuition (Wegner,
2016). Although not a scientific approach to probability, the subjective method is often based
on wisdom and experiences. Suppose an experienced head of the mathematics department at
a college analyses students’ performance in mathematics at the end of term 1, and takes note
of the poor performing students. Drawing form his experience, the head of department would
have knowledge of the scope of the mathematics module and hence may be able to give an
accurate probability that a certain proportion of the poor performing students would pass the
final examination. However, this approach of determining probabilities is not used extensively
in statistical analysis because it is difficult to statistically verify the correctness of the results.

In contrast, objective probability employs scientific approaches to determining probabilities.

Since scientific approaches are used, the probability of an event occurring can be verified
statistically through surveys or empirical observations (Wegner, 2016). The objective
probability approach is widely used in statistical analysis.

1.2. Properties of Probability

When working with probabilities it is important to understand some of its most basic
properties. A list of five most basic properties is as follows:

● A probability value always lies between 0 and 1 (i.e. 0 ≤ 𝑃(𝐴) ≤ 1). Note that 0 and 1
are included in the interval.
● If it is impossible for an event to occur, then 𝑃(𝐴) = 0. For example, the probability
of a Spaza shop with capital investment of R8 000 making R80 000 profit in one day
is zero.
● If it is certain that an event will occur, then 𝑃(𝐴) = 1. The probability that the human
resource office at a company processes at least one leave application in a year is 1.
● The sum of the probabilities of all possible events equals 1 (i.e. for 𝑘 possible events
in a sample space, 𝑃(𝐴1 ) + 𝑃(𝐴2 ) + 𝑃(𝐴3 ) + ⋯ + 𝑃(𝐴𝑘 ) = 1). For example if a coin is
1 1
tossed, there are two outcomes {Head, Tail), and 𝑃(𝐻𝑒𝑎𝑑) + 𝑃(𝑇𝑎𝑖𝑙) = + = 1.
2 2
● Complementary probability: if 𝑃(𝐴) is the probability of event A occurring, then the
probability of event A not occurring (i.e. 𝐴) is defined as 𝑃(𝐴) = 1 − 𝑃(𝐴). For example,
if there is 60% chance that a salesperson would make R100 000,00 in one day then
60
𝑃(𝑚𝑎𝑘𝑖𝑛𝑔 𝑅100 000,00) = = 0,6 and 𝑃(𝑛𝑜𝑡 𝑚𝑎𝑘𝑖𝑛𝑔 𝑅100 000,00) = 1 − 0,6 = 0,4
100

Learn more about this

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 More information relating to types of probability, see Wegner (2016, p.107-109)

1.3. Probability Concepts

It is important to understand some basic probability concepts so that working with

problematic situations involving probabilities becomes easier. In this section, we focus on the
following basic probability concepts.

● The intersection of events

● The union of events
● Mutually exclusive events
● Collectively exhaustive events
● Statistically independent events

The following example will help us to understand the differences between these concepts.

Example 12: Consider the table below showing recruitment by sex at a new company.

Department Sex Total

Males Females
Transport 3 3 6
Marketing 3 5 8
Security 6 4 10
Human resources 3 1 4
Total 15 13 28

Table 5: Cross-tabulation table - recruitment by sex

a) Intersection of events

The intersection of two events 𝐴 and 𝐵 is the set of all outcomes that belong to both 𝐴 and
𝐵 simultaneously. It is written as 𝐴 ∩ 𝐵 (i.e. 𝐴 and B).

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 Figure 18: Venn diagram showing intersection of two events (𝐴 ∩ 𝐵)

To illustrate, we answer the following question: What is the probability that a randomly
selected employee will be female and belong to the security department?

Solution:

Let 𝐴 = event (female employee)

Let 𝐵 = event (security employee)

Then (𝐴 ∩ 𝐵) the set of all employees who are female ‘and’ are recruited in security
department.

From table 5, there are 4 employees out of 28 who are female and recruited in security
department.
4
Thus 𝑃(𝐴 ∩ 𝐵) = 𝑃(𝐹𝑒𝑚𝑎𝑙𝑒 ∩ 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦) = 28 = 0,143

A graphical representation is shown in Figure 19:

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 Figure 19: Venn diagram of female and security employees

b) Union of events

The union of two events 𝐴 and 𝐵 is the set of all outcomes that belong to either 𝐴 or 𝐵
or both. It is written as 𝐴 ∪ 𝐵.

Figure 20: Venn diagram of the union of events (𝐴 ∪ 𝐵)

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To illustrate, we answer the following question: What is the probability that a randomly
selected employee will be female or will be an employee in the security department, or both?

Solution:

Let 𝐴 = event (female employee)

Let 𝐵 = event (security employee)

Then (𝐴 ∪ 𝐵) the set of all employees who are female or employed in security department or
both (female and security) employees. From table 5, there are 13 female employees (includes
4 security employees), 10 security employees (includes 4 female employees) and 4 employees
who are female and in security department. This means that there are 19 different employees
(13 + 10 − 4) that are either female or in security or both.
13+10−4 19
Thus 𝑃(𝐴 ∪ 𝐵) = 𝑃(𝑓𝑒𝑚𝑎𝑙𝑒 ∪ 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦) = 28
= 28 = 0,679

A graphical representation is shown in Figure 21:

Figure 21: Venn diagram of white or security employees

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c) Mutually exclusive

Events are mutually exclusive if they cannot occur together on a single trial of a random
experiment (i.e. not at the same point in time).

Figure 22: Venn diagram showing mutually exclusive events 𝐴 ∩ 𝐵 = 0

For example, we answer the question: what is the probability of randomly selecting an
employee who is both male and female?

Solution:

Let 𝐴 = event (male employee)

Let 𝐵 = event (female employee)

Events A and B are mutually exclusive because a randomly selected employee cannot be male
and female at the same time
0
Thus 𝑃(𝐴 ∩ 𝐵) = 𝑃(𝑚𝑎𝑙𝑒 ∩ 𝑓𝑒𝑚𝑎𝑙𝑒) = 28 = 0. A probability of zero means an impossible event.

d) Collectively exhaustive events

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Events are collectively exhaustive when the union of all possible events is equal to the sample
space. To illustrate we answer the question: what is the probability of selecting an employee
who is male or female from the sample of 28 employees (refer to table 5).

Solution:

Let 𝐴 = event (male employee)

Let 𝐵 = event (female employee)

And we have (𝐴 ∪ 𝐵) as the sample space of all employees

15 13
Thus 𝑃(𝐴 ∪ 𝐵) = 𝑃(𝑚𝑎𝑙𝑒) + 𝑃(𝑓𝑒𝑚𝑎𝑙𝑒) = + =1
28 28

e) Statistically independent events

Two events 𝐴 and 𝐵 are statistically independent if the occurrence of event 𝐴 has no effect on
the outcome of event 𝐵 and vice-versa.

It is also important to note the key difference between ‘mutually exclusive events’ and
‘statistically independent events’ to avoid confusion. When two events are mutually exclusive,
they cannot occur together. On the other hand, when two events are statistically independent,
they can occur together, but they do not have an influence on each other. Here is an example
for statistically independent events:

Let A = event (The manager will have a meeting in the boardroom)

Let B = event (It will rain)

Notice here that the occurrence of the meeting in the boardroom does not influence the
weather and vice-versa. In fact, the two events can occur simultaneously.

Learn more about this

More information relating to basic probability concepts, see Wegner (2016, p.109 -113)

Calculating Objective Probabilities

Objective probabilities can be classified into three types namely: marginal probability, joint
probability, and conditional probability. We illustrate their differences using an example.

Example 13: Consider the information relating to numbers of people (grouped according to
gender) who have a particular blood group.

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 Table 6: Blood groups

● Marginal probability P(A): a marginal probability is a probability of a single event ‘A’

occurring only. A frequency table is used to find marginal probabilities because it
shows the outcomes of only one random variable (Wegner, 2016). It is named
‘marginal’ because computing probability uses values on the margins of a frequency
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑤𝑖𝑡ℎ 𝑏𝑙𝑜𝑜𝑑 𝑔𝑟𝑜𝑢𝑝 𝐴𝐵 22
table. In example 13, 𝑃(𝐵𝑙𝑜𝑜𝑑 𝑔𝑟𝑜𝑢𝑝 𝐴𝐵) = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒
= 140 =
0,16.

● Joint probability P(𝐴 ∩ 𝐵): a joint probability is the probability that both event A and
event B will occur simultaneously on a single trial of a random experiment (Wegner,
2016). A joint event refers to the outcomes of two or more random variables occurring
together. It is the same as the intersection of two events in a Venn diagram. A cross
tabulation is used to find joint probabilities because it shows the outcomes of two
random variables. In example 13, the probability of being female and belong to blood
group O can be calculated as follows:
27
𝑃(𝐹𝑒𝑚𝑎𝑙𝑒 𝑎𝑛𝑑 𝑂) = 𝑃(𝐹 ∩ 𝑂) = = 0,19
140

● Conditional probability P(𝐴|𝐵): a conditional probability is the probability of event

A occurring, given that event B has already occurred. It is the probability of an event
on condition that a certain criteria is satisfied. It is written as P(𝐴|𝐵). The formula is:
𝑃(𝐴 ∩ 𝐵)
𝑃(𝐵) =
𝑃(𝐵)
The key feature of conditional probability is that the sample space is reduced to the
set of outcomes associated with the ‘given’ prior to the occurrence of event B only. The
prior information (i.e. event B) can change the likelihood of event A occurring. In
example 13, if an individual was selected randomly and found to be male, what is the
probability that he has a blood group A? Here the total possible outcomes constitute
a subset (males i.e. 70) of the total number of people. This probability is read as
probability of A given M.

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 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑚𝑎𝑙𝑒𝑠 𝑤ℎ𝑜 ℎ𝑎𝑠 𝑎 𝑏𝑙𝑜𝑜𝑑 𝑔𝑟𝑜𝑢𝑝 𝑂 21
𝑃(𝑀) = =
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑚𝑎𝑙𝑒𝑠 70

Learn more about this

For more information relating to calculating objective probabilities, see Wegner (2016).

1.4. Probability Rules

The probability rules are more useful when calculating probabilities of compound or multiple
events occurring simultaneously. Two probability rules are presented below:

● The addition rule: useful for non-mutually exclusive events and mutually exclusive
events. It relates to the union of events. Used to find the probability of either event A
or event B, or both events occurring simultaneously in a single trial of a random
experiment
● The multiplication rule: useful for statistically dependent events and statistically
independent events. It relates to the union of events. It is used to find the probability
of event A and event B occurring together in a single trial of a random experiment.

Additional rule: non-mutually exclusive events

Non-mutually exclusive events are those events that can occur together in a single trial of a
random experiment. Therefore the probability of either event A or event B or both occurring
in a single trial of a random experiment is defined as:

𝑃(𝐴 ∪ 𝐵) = 𝑃(𝐴) + 𝑃(𝐵) − 𝑃(𝐴 ∩ 𝐵)

If a Venn diagram is used for illustration, the union of two non-mutually exclusive events is the
combined outcomes of the two overlapping events A and B. From example 13, if an individual
was selected randomly, what is the probability that the individual is either female or someone
with blood group AB, or both?

Solution:
Let 𝐴 = event (Female)
Let 𝐵 = event (Blood group AB)
Notice that the two events are not mutually exclusive as they occur at the same time.

13
 70
Therefore: 𝑃(𝐴) = 𝑃(𝐹𝑒𝑚𝑎𝑙𝑒) = 140 = 0,5
22
𝑃(𝐵) = 𝑃(𝐴𝐵) = 140 = 0,157
10
𝑃(𝐴 ∩ 𝐵) = 𝑃(𝐹𝑒𝑚𝑎𝑙𝑒 𝑤𝑖𝑡ℎ 𝑏𝑙𝑜𝑜𝑑 𝑔𝑟𝑜𝑢𝑝 𝐴𝐵) = = 0,0714
140

Then 𝑃(𝐴 ∪ 𝐵) = 𝑃(𝑒𝑖𝑡ℎ𝑒𝑟 𝑓𝑒𝑚𝑎𝑙𝑒 𝑜𝑟 𝑔𝑟𝑜𝑢𝑝 𝐴𝐵 𝑜𝑟 𝑏𝑜𝑡ℎ)

= 𝑃(𝐹𝑒𝑚𝑎𝑙𝑒) + 𝑃(𝐺𝑟𝑜𝑢𝑝 𝐴𝐵) − 𝑃(𝐹𝑒𝑚𝑎𝑙𝑒 𝑤𝑖𝑡ℎ 𝑏𝑙𝑜𝑜𝑑 𝑔𝑟𝑜𝑢𝑝 𝐴𝐵)
= 0,5 + 0,157 − 0,0714
= 0,5856

Additional rule: mutually exclusive events

Mutually exclusive events are those events that cannot occur together in a single trial of a
random experiment. For mutually exclusive events, there is no intersectional event, meaning
that 𝑃(𝐴 ∩ 𝐵) = 0. Thus the probability of either event A or event B (but not both) occurring
in a single trial of a random experiment is defined as:

𝑃(𝐴 ∪ 𝐵) = 𝑃(𝐴) + 𝑃(𝐵)

If events are mutually exclusive, then the probability is the sum of only the two marginal
probabilities of events A and B. Using Venn diagrams, the union of two mutually exclusive
events is the sum of the outcomes of each of the two (non-overlapping) events A and B
separately. For example; what is the probability that a randomly selected individual is either
someone with blood group O or AB?

Solution:

Let 𝐴 = event (person with blood group O)

Let 𝐵 = event (person with blood group AB)

The two events are mutually exclusive since they cannot occur simultaneously. Therefore
𝑃(𝐴 ∩ 𝐵) = 0.

50
Since: 𝑃(𝐴) = 𝑃(𝐺𝑟𝑜𝑢𝑝 𝑂) = 140 = 0,357
22
𝑃(𝐵) = 𝑃(𝐺𝑟𝑜𝑢𝑝 𝐴𝐵) = 140 = 0,157

Then 𝑃(𝐴 ∪ 𝐵) = 𝑃(𝐺𝑟𝑜𝑢𝑝 𝑂) + 𝑃(𝐺𝑟𝑜𝑢𝑝 𝐴𝐵)

= 0,357 + 0,157
= 0,514

Multiplication Rule for statistically dependent events

The multiplication rule is often used to find the joint probability of events A and B occurring
together in a single trial of random experiment (i.e. the intersection of the two events). This

14
rule assumes that the two events A and B are associated (i.e. they are dependent events). The
multiplication rule for dependent events is given by the following:

𝑃(𝐴 ∩ 𝐵) = 𝑃(𝐴|𝐵) × 𝑃(𝐵)

Where: 𝑃(𝐴 ∩ 𝐵) = 𝑗𝑜𝑖𝑛𝑡 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝐴 𝑎𝑛𝑑 𝐵
𝑃(𝐵) = 𝑐𝑜𝑛𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝐴 𝑔𝑖𝑣𝑒𝑛 𝐵
𝑃(𝐵) = 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝐵 𝑜𝑛𝑙𝑦

Example 14

Suppose there are 3 green marbles, 4 blue marbles, and 3 red marbles in a bag. What is the
probability of drawing 2 blue marbles from the bag if the first marble is not replaced before
the second marble is drawn?

Solution:

Let A = event (drawing first blue marble)

Let B = event (drawing second blue marble)
These two events are dependent because the second event is influenced by the first event (i.e.
the marble drawn at first is not replaced). There are 10 marbles altogether in the bag.
4
𝑃(1𝑠𝑡 𝑏𝑙𝑢𝑒 𝑚𝑎𝑟𝑏𝑙𝑒) =
10
Since the first marble drawn is not replaced, then there are 9 marbles left in the bag altogether.
3
Of these 9 marbles left in the bag, only 3 are blue. So 𝑃(2𝑛𝑑 𝑏𝑙𝑢𝑒 𝑚𝑎𝑟𝑏𝑙𝑒) = 9
Therefore,
4 3 2
𝑃(1𝑠𝑡 𝑏𝑙𝑢𝑒 𝑚𝑎𝑟𝑏𝑙𝑒) × 𝑃(1𝑠𝑡 𝑏𝑙𝑢𝑒 𝑚𝑎𝑟𝑏𝑙𝑒) = × =
10 9 15

Multiplication Rule for statistically independent events

If two events, A and B, are statistically independent (i.e. there is no association between the
two events) then the multiplication rule reduces to the product of the two marginal
probabilities only:
𝑃(𝐴 ∩ 𝐵) = 𝑃(𝐴) × 𝑃(𝐵)
Where: 𝑃(𝐴 ∩ 𝐵) = 𝑗𝑜𝑖𝑛𝑡 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝐴 𝑎𝑛𝑑 𝐵
𝑃(𝐴) = 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝐴 𝑜𝑛𝑙𝑦
𝑃(𝐵) = 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝐵 𝑜𝑛𝑙𝑦

The following test is used to check if two events are statistically independent. Two events are
statistically independent if the following is true:

𝑃(𝐵) = 𝑃(𝐴)

This means that the prior occurrence of event B does not influence the outcome of event A.

15
Example 15

Suppose you throw two fair dice. What is the probability of obtaining a 3 on each dice?

Solution:

The two events are independent – the outcome of the first event (throwing the first die) does
not influence the occurrence of the second event (throwing the second die).

𝑃(3 𝑜𝑛 1𝑠𝑡 𝑑𝑖𝑒 𝑎𝑛𝑑 3 𝑜𝑛 2𝑛𝑑 𝑑𝑖𝑒) = 𝑃(3 𝑜𝑛 𝑓𝑖𝑟𝑠𝑡 𝑑𝑖𝑒) × 𝑃(3 𝑜𝑛 𝑠𝑒𝑐𝑜𝑛𝑑 𝑑𝑖𝑒)
1 1
= ×
6 6
1
=
36

Learn more about this

For more information relating to probability rules, see Wegner (2016)

1.5. Probability Trees

A probability tree is a graphic way to apply probability rules where there are multiple events
that occur in sequence and these events can be represented by branches (similar to a tree).

Example 16: Consider two fair coins that are tossed, find the outcomes using a tree diagram.
What is the probability that you will obtain two heads?

Solution:

16
The outcomes are {(H,H); (H,T); (T,H); (T,T)}
1
Probability 𝑃(𝑇𝑤𝑜 𝐻𝑒𝑎𝑑𝑠) = 𝑃(𝐻, 𝐻) = 4

Learn more about this

Solving probabilities using tree diagrams can be very challenging. This video provides more
detailed and clear explanations:
https://www.youtube.com/watch?v=kNOrDWm15bY
https://www.youtube.com/watch?v=z9FKoQ8a_1E

1.6. The Counting Rules: Permutations and Combinations

Probability calculations involve counting the number of event outcomes (𝑟) and the total
number of possible outcomes (𝑛) and expressing this as a ratio. Often the values for 𝑟 and 𝑛
cannot be counted because of the large number of possible outcomes involved. Counting
rules help to find values for 𝑟 and 𝑛. There are three basic counting rules namely: the
multiplication rule, the permutation rule, and the combination rule (Wegner, 2016).

a) Multiplication rule of counting

For a single event, the total number of different ways (unique ways) in which 𝑛 objects (i.e.
the full sample space) can be arranged (ordered) is given by 𝑛! (read as ‘n factorial’).
𝑛! = 𝑛 × (𝑛 − 1) × (𝑛 − 2) × (𝑛 − 3) × … × 3 × 2 × 1 (note that 0! = 1)
For example, consider the number of unique arrangements of seven 100m athletes in a seven-
lane track. The number of different arrangements of the seven athletes will be:
7! = 7 × 6 × 5 × 4 × 3 × 2 × 1 = 5040

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For combined events, if a random process has 𝑛1 possible outcomes for event 1, 𝑛2 possible
outcomes for event 2, …, 𝑛𝑗 possible outcomes for event 𝑗, then the total number of possible
outcomes for the 𝑗 events collectively is:
𝑛1 × 𝑛2 × 𝑛3 × … × 𝑛𝑗

b) Permutation rule of counting

A permutation is a number of distinct (different) ways of selecting (or arranging) a subset of

𝑟objects drawn from a larger group of 𝑛 objects, where the order of selecting objects is
important. Each possible arrangement of the subset of 𝑟 objects is called a permutation. The
number of different ways of arranging 𝑟 objects selected from 𝑛 objects, where the order is
important is given by:

𝑛!
𝑛 𝑃𝑟 =
(𝑛 − 𝑟)!
Where: 𝑟 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑏𝑗𝑒𝑐𝑡𝑠 𝑠𝑒𝑙𝑒𝑐𝑡𝑒𝑑 𝑎𝑡 𝑎 𝑡𝑖𝑚𝑒

𝑛 = 𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑏𝑗𝑒𝑐𝑡𝑠 𝑓𝑟𝑜𝑚 𝑤ℎ𝑖𝑐ℎ 𝑡𝑜 𝑠𝑒𝑙𝑒𝑐𝑡

Example 17: A Statistics debating team consists of 5 speakers. a) In how many ways can all 5
speakers be arranged in a row for a photo? b) How many ways can the captain and vice-captain
be chosen?

Solution:

a) The speakers can be arranged in 120 ways

5! 5! 5×4×3×2×1
5! = 5 × 4 × 3 × 2 × 1 = 120 OR 5 𝑃5 = (5−5)! = = = 120
0! 1

b) Two people can be chosen, captain and vice-captain

5! 5! 5×4×3×2×1 120
Therefore 5 × 4 = 20 OR 5 𝑃2 = (5−2)! = 3! = 3×2×1
= 6
=2

c) Combination rule

A combination is the number of distinct ways of selecting (or arranging) a subset of 𝑟 objects
drawn from a larger group of 𝑛 objects where the order of selecting objects is not important.
Each separate grouping of the subset of 𝑟 objects is called a combination. The number of ways
of selecting 𝑟 objects selected from 𝑛 objects, not considering the order of selection is given
by:
𝑛!
𝑛 𝐶𝑟 =
𝑟! (𝑛 − 𝑟)!
Where: 𝑟 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑏𝑗𝑒𝑐𝑡𝑠 𝑠𝑒𝑙𝑒𝑐𝑡𝑒𝑑 𝑎𝑡 𝑎 𝑡𝑖𝑚𝑒

𝑛 = 𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑏𝑗𝑒𝑐𝑡𝑠 𝑓𝑟𝑜𝑚 𝑤ℎ𝑖𝑐ℎ 𝑡𝑜 𝑠𝑒𝑙𝑒𝑐𝑡

18
Example 18: How many ways can a basketball team of 5 players be chosen from 9 players?

Solution:
9! 9! 362880
9 𝐶5 = = = = 126
5! (9 − 5)! 5! 4! (120)(24)

Learn more about this

For more information regarding permutations and combinations, go to this link

https://www.youtube.com/watch?v=XPPYYM6WCuE

This video provides information that summarizes basic probability concepts

https://www.youtube.com/watch?v=CBnGs9t6RxY

2. Probability Distributions

A probability distribution is a list of all the possible outcomes of a random variable and their
associated probabilities of occurrence (Wegner, 2016). The probability distribution for a
random variable X provides the possible outcomes for X, and the probabilities associated with
each possible value.

2.1. Types of Probability Distributions

Probability distributions functions can be classified as either discrete or continuous. While a

discrete random variable takes on a finite or countably infinite number of distinct possible
values, a continuous random variable takes on an infinite number of possible values. In this
section, the focus is on two discrete probability functions (called the binomial probability
distribution, and the Poisson probability distribution) and one continuous probability function
(called the normal probability distribution).

Learn more about this

For more information relating to types of probability distributions, see Wegner (2016, p.133)

19
2.2. Discrete Probability Distributions

Discrete probability distributions assume that the outcomes of a random variable under study
can take on only specific values (normally integers). These distributions assign a probability to
each value of a discrete random variable X. Some examples of discrete probability distributions
are:

● Number of enrolled Engineering students (i.e. 0, 1, 2, 3, …)

● Number of faulty machines at a company (i.e. 0, 1, 2, 3, …)
● Number of people using the Gautrain per day (i.e. 0, 1, 2, 3, …)

For each possible outcome of a discrete random variable in a sample space, there is a non-
zero probability. The zero probability is only assigned for values of the random variable outside
the sample space. As noted above, binomial probability distribution and Poisson probability
distribution are the commonly used discrete probability distribution functions.

Learn more about this

More information and detailed explanations about discrete probability distributions, please
click the on the link below:
https://www.youtube.com/watch?v=UnzbuqgU2LE

2.3. Binomial Probability Distribution

A discrete random variable follows the binomial distribution if it satisfies the following four
conditions:

● The random variable is observed 𝑛 number of times (𝑛 = 1, 2, 3, …)

● There are only two, mutually exclusive and collectively exhaustive, outcomes associated
with the random variable on each object in the sample. These two outcomes are
labelled ‘success’ and ‘failure’ (i.e. an application is successful or unsuccessful, a motor
vehicle is insured or not insured).
● Each outcome has an associated probability. The probability for the success outcome
is denoted by 𝑝, and the probability for the failure outcome is denoted by 1 − 𝑝.
● The objects are assumed to be independent of each other, meaning the 𝑝 remains
constant for each sampled object.

Before we calculate the probabilities for probability distributions, let us first discuss
the meanings of the following phrases that are often used in probability problem solving.

20
At least three (𝑥 ≥ 3): This means that three is the minimum value and if we say at least
three books, it means three or four or five books.
At most three (𝑋 ≤ 3): This means that three is the maximum value. At most three books
means no book or one book or two books or three books.
No more than three (𝑋 ≤ 3): This means that three is the maximum number. With regards
to number of books, we would say that it means, three or two or one or zero books.
Less than three (𝑋 < 3): This means that three is not included and we are only interested in
the values smaller than three, that is, zero or one or two.
More than three 𝑋 > 3): This means that three is not included and we are only interested in
the values larger than three, that is, four, five, six etc.

Once these four conditions are satisfied, the following binomial question can be answered.

Binomial question

What is the probability that 𝑥 successes will occur in a randomly drawn sample of 𝑛 objects?

The following formula is used to address the binomial question:

𝑃(𝑥) = 𝑛 𝐶𝑥 𝑝 𝑥 (1 − 𝑝)𝑛−𝑥 𝑓𝑜𝑟 𝑥 = 0, 1, 2, 3, … , 𝑛

Where: 𝑛 = 𝑡ℎ𝑒 𝑠𝑎𝑚𝑝𝑙𝑒 𝑠𝑖𝑧𝑒 𝑖. 𝑒. 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠

𝑥 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑢𝑐𝑐𝑒𝑠𝑠 𝑜𝑢𝑡𝑐𝑜𝑚𝑒𝑠 𝑖𝑛 𝑡ℎ𝑒 ′𝑛′ 𝑖𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡𝑙𝑦 𝑑𝑟𝑎𝑤𝑛 𝑜𝑏𝑗𝑒𝑐𝑡𝑠

𝑝 = 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑎 𝑠𝑢𝑐𝑐𝑒𝑠𝑠 𝑜𝑢𝑡𝑐𝑜𝑚𝑒 𝑜𝑛 𝑎 𝑠𝑖𝑛𝑔𝑙𝑒 𝑖𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑜𝑏𝑗𝑒𝑐𝑡

(1 − 𝑝) = 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑎 𝑓𝑎𝑖𝑙𝑢𝑟𝑒 𝑜𝑢𝑡𝑐𝑜𝑚𝑒 𝑜𝑛 𝑎 𝑠𝑖𝑛𝑔𝑙𝑒 𝑖𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑜𝑏𝑗𝑒𝑐𝑡

The 𝑥 values (called the domain) represent the number of success outcome that can be
observed in a sample of 𝑛 objects. It is also important to note that the success outcome is
always associated with the probability, 𝑝. Thus the outcome that must be labelled as the
success outcome is identified from the binomial question.

Example 19: A surgery has a success rate of 85%. Suppose that the surgery is performed on
three patients. What is the probability that the surgery is successful on exactly 2 patients?

Solution: The number of successful surgeries, 𝑋 can be represented by a binomial distribution

with 𝑛 = 3 trials, success probability 𝑝 = 0,85 and failure probability 𝑞 = 1 − 𝑝 = 0,15.

Therefore:
𝑃(2) = 3 𝐶2 𝑝2 𝑞 𝑛−2 = 3 𝐶2 (0,85)2 (0,15)1 = 0,325

Descriptive statistical measures of the Binomial distribution

21
A measure of central location and a measure of dispersion can be calculated for any random
variable that follows a binomial distribution using the following formulae:

𝑀𝑒𝑎𝑛: 𝜇 = 𝑛𝑝
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛: 𝜎 = √𝑛𝑝(1 − 𝑝)
From Example 19, calculate the mean of 𝑋.

Solution: 𝑀𝑒𝑎𝑛: 𝜇 = 3 × 0,85 = 2,55

Learn more about this

For more information relating to binomial probability distributions, see Wegner (2016)

2.4. Poisson Probability Distribution

As noted above, a Poisson probability distribution is a discrete process. A Poisson process

measures the number of occurrences of a particular outcome of a discrete random variable in
a predetermined interval, that is, interval of time, space, and volume, for which an average
number of occurrences of the outcome is known or can be determined (Wegner, 2016).

The conditions satisfied by a Poisson distribution are as follows:

● The occurrence or non-occurrence of the event over any interval is independent of the
occurrence or non-occurrence over any other interval.
● The probability of the occurrence of an event is the same for any two intervals of the
same length.
● The occurrences are uniformly distributed throughout the interval of time

Some of the examples of a Poisson process (also see Wegner, 2016) are:

● The number of breakdowns of a machine in a day

● The number of sales made by a salesperson in one month
● The number of challenges identified at the end of a field project
● The hourly number of customers arriving at a bank
● The number of typos in a book

From these examples, it can be seen that the number of occurrences of a given outcome of
the random variable, 𝑥, can take on any integer value from 0 to infinity (i.e. 0 ≤ 𝑥 < ∞).

22
Poisson question

What is the probability of 𝑥 occurrences of a given outcome being observed in a

predetermined time, space or volume interval?

To answer the Poisson question, the following Poisson probability distribution formula can
be used:

𝑒 −𝜆 𝜆𝑥
𝑃(𝑥) = 𝑓𝑜𝑟 𝑥 = 0, 1, 2, 3, …
𝑥!
Where: 𝜆=
𝑡ℎ𝑒 𝑚𝑒𝑎𝑛 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑐𝑐𝑢𝑟𝑒𝑛𝑐𝑒𝑠 𝑜𝑓 𝑎 𝑔𝑖𝑣𝑒𝑛 𝑜𝑢𝑡𝑐𝑜𝑚𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑟𝑎𝑛𝑑𝑜𝑚 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒

𝑓𝑜𝑟 𝑎 𝑝𝑟𝑒𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒𝑑 𝑡𝑖𝑚𝑒, 𝑠𝑝𝑎𝑐𝑒 𝑜𝑟 𝑣𝑜𝑙𝑢𝑚𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙

𝑒 = 𝑎 𝑚𝑎𝑡ℎ𝑒𝑚𝑎𝑡𝑖𝑐𝑎𝑙 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡, 𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒𝑙𝑦 𝑒𝑞𝑢𝑎𝑙 𝑡𝑜 2,71828

𝑥=
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑐𝑐𝑢𝑟𝑒𝑛𝑐𝑒𝑠 𝑜𝑓 𝑎 𝑔𝑖𝑣𝑒𝑛 𝑜𝑢𝑡𝑐𝑜𝑚𝑒 𝑓𝑜𝑟 𝑤ℎ𝑖𝑐ℎ 𝑎 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑖𝑠 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑

(𝑥 𝑐𝑎𝑛 𝑏𝑒 𝑎𝑛𝑦 𝑑𝑖𝑠𝑐𝑟𝑒𝑡𝑒 𝑣𝑎𝑙𝑢𝑒 𝑓𝑟𝑜𝑚 0 𝑡𝑜 𝑖𝑛𝑓𝑖𝑛𝑖𝑡𝑦)

Example 20: The number of typographical errors in a PhD thesis is Poisson distributed with a
mean of 1,9 per 100 pages. If 100 pages of the thesis are seleceted randomly, what is the
probability that there are no typographical errors?

𝑒 −𝜆 𝜆𝑥 𝑒 −1,9 1,90 𝑒 −1,9 (1)

Solution: 𝑃(𝑋 = 0) = 𝑥!
= 0!
= 1
= 0,1496

Descriptive statistical measures of the Poisson distribution

A measure of central location and dispersion can be calculated for any random variable that
follows a Poisson process using the following formula:

𝑀𝑒𝑎𝑛: 𝜇 = 𝜆
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛: 𝜎 = √𝜆

Learn more about this

For more information about binomial and Poisson probability distributions, see this video
https://www.youtube.com/watch?v=BR1nN8DW2Vg

23
 For more information relating to binomial probability distributions, see Wegner (2016:
141-150)

3. Unit Summary

This unit provided an introduction to probability concepts, probability distribution, and

sampling. Specifically, the focus was on 1) Basic Probability Concepts (Types of Probability,
Properties of Probability, Probability Concepts, Objective Probabilities, Probability Rules,
Probability Trees, Counting Rules: Permutations and Combinations), 2) Probability Distribution
(Types of Probability Distributions, Discrete Probability Distributions, Binomial Probability
Distribution, Poisson Probability Distribution, Continuous Probability Distributions, Normal
Probability Distribution. The following video provides further insights in terms of
understanding probability distribution:

https://www.youtube.com/watch?v=UnzbuqgU2LE&t=1368s

4. References
Anderson, D., Sweeney, D., Williams, T. (2011) Statistics for Business and Economics, South-
Western, Cengage Learning

Doane, D., & Seward, L. (2011). Applied Statistics in business and Economics (3rd Ed).
Mcgraw-Hill

Groebner, D., Shannon, P., Fry, P., & Smith, K. (2011). Business Statistics: a decision-making
approach. Pearson Education Inc.

Levine, D., Krehbiel, T. & Berenson, M. (2009). Business Statistics: A First Course, (5th Edition),
Prentice-Hall, Inc.

Wegner, T. (2016). Applied Business Statistics: Methods and Excel-based applications (4th Ed).
Juta & Company

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