PROBABILITY

SJ10103
ECONOMICS STATISTICS

DR. SITI RAHAYU BINTI MOHD. HASHIM

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Aims
Able to
 Define probability
 Describe approaches to probability.
 Understand several important terms and definitions
 Counting sample points.
 Understand the terms conditional probability and
joint probability.
 Use the rules of addition and multiplication
 Organize and compute probabilities using tree
diagram
 Probability using Bayes’ Theorem.
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Keywords
 Probability - a value between zero and one
- describing the relative possibility that
an event will occur.
- sometimes known as chances or
likelihood.

 Experiment: A process that leads to the

occurrence of one and only one of several
possible observations.
 Outcome: A particular result of an experiment.
 Event: A collection of one or more outcome of an
experiment.
Example
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Some people are in favor of reducing federal

taxes to increase consumer spending and
others are against it. Two persons are selected
and their opinions are recorded. List the
possible outcomes.
Answer:
Person
Outcome 1 2
1 Against Against
2 Against Favor
3 Favor Against
4 Favor Favor
 5 SJ13103, 22 September 2016

Definitions
 Definition 2.1: The set of all possible outcomes of
a statistical experiment is called the sample space
and is represented by the symbol S.

 Definition 2.2: An event is a subset of a sample

space.

 Definition2.3: The complement of an event A

with respect to S is the subset of all elements of S
that are not in A. We denote the complement of A
by the symbol A’, 𝐴 , or 𝐴𝑐 .
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Definitions
 Definition
2.4: The intersection of two events A
and B, denoted by the symbol A∩B, is the event
containing all elements that are common to A and
B.

 Definition2.5: Two events A and B are mutually

exclusive, or disjoint, if A∩B = { }, that is , if A and B
have no elements in common

 Definition
2.6: The union of the two events A and
B, denoted by the symbol A∪B, is the event
containing all the elements that belong to A or B or
both.
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Sample points - Multiplication Rules

 Theorem 2.1: If an operation can be performed
in n1 ways, and if for each of these ways a second
operation can be performed in n2 ways, then the
operations can be performed together in n1n2
ways.

 Theorem 2.2: If an operation can be performed

in n1 ways, and if for each of these a second
operation can be performed in n2 ways, and for
each of the first two a third operation can be
performed in n3 ways, and so forth, then the
sequence of k operations can be performed in
n1n2…nk ways.
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Examples - Multiplication Rules

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Sample points - Permutations

 Definition 2.7: A permutation is an arrangement
of all or part of a set of objects.

 Theorem 2.3: The number of permutations of n

objects is n!.

 Theorem 2.4: The number of permutations of n

distinct objects taken r at a time is
𝑛!
nPr =
𝑛−𝑟 !
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Example - Permutations
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Sample points – Circular and partition

 Theorem 2.5: The number of permutations of n
objects arranged in a circle is (n-1)!.

 Theorem 2.6: The number of distinct permutations of

n things of which 𝑛1 are of one kind, 𝑛2 of a second kind,
……, 𝑛𝑘 of a k-th kind is
𝑛!
𝑛1 ! 𝑛2 ! … 𝑛𝑘 !

 Theorem 2.7: The number of ways of partitioning a

set of n objects into r cells with 𝑛1 elements in the first
cell, 𝑛2 elements in the second, and so forth, is
𝑛 𝑛!
𝑛1 , 𝑛2 , … , 𝑛𝑟 = 𝑛1 ! 𝑛2 ! … 𝑛𝑟 !
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Examples – Partitions
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Sample points – Combinations

 Theorem 2.8: The number of combinations

of n distinct objects taken r at a time is

𝑛 𝑛!
=
𝑟 𝑟! 𝑛 − 𝑟 !
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Sample points – Combinations

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Probability Approaches
 Definition2.8: The probability of an event A is the
sum of the weights of all sample points in A.
Therefore,
0 ≤ 𝑃 𝐴 ≤ 1, 𝑃 ∅ = 0, and 𝑃 𝑆 = 1.

 Classical, Empirical & Subjective approaches

 Theorem 2.9: If an experiment can result in any

one of the N different equally likely outcomes, and if
exactly n of these outcomes correspond to event A,
then the probability of event A is
𝑛
𝑃 𝐴 =
𝑁
Example
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In each of the following cases, indicate whether

classical, empirical, or subjective probability is
used.

i) A basketball player makes 30 out of 50 foul

shots. The probability is 0.6 that she makes the
next foul shot attempted. (Empirical)

ii) A seven-member committee of students is

formed to study environmental issues. What is the
likelihood that any one of the seven is chosen as
the spokesperson? (Classical)
Example: cont.
17 SJ13103, 22 September 2016

iii) You purchase one of 5 million tickets sold

a lucky draw. What is the likelihood you win
the Grand Prize? (Classical)

iv) The probability of an earthquake in

Kundasang, Sabah in the next 10 years is 0.80.
(Empirical, ps: based on seismological data)
Example
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A sample of 40 oil industry executives were

selected to test a questionnaire. One question
about environmental issue required a yes or
no answer.

a) What is the experiment?

The survey of 40 people about
environmental issues.
b) List one possible event.
26 or more respond ‘yes’
Example: cont.
19 SJ13103, 22 September 2016

c) Ten of the 40 executives responded “yes”.

Based on these responses, what is the
probability that an oil industry executive will
respond “yes”?
P(10 say ‘yes’) = 10/40 = 0.25.
d) What concept of probability does this
illustrates? Empirical
e) Are each of the possible outcomes equally
likely and mutually exclusive?
Not equally likely but mutually exclusive.
Rules
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 Theorem 2.10: If A and B are two events,

then
𝑃 𝐴 𝑜𝑟 𝐵 = 𝑃 𝐴 + 𝑃 𝐵 − 𝑃 𝐴 𝑎𝑛𝑑 𝐵
𝑃 𝐴 ∪ 𝐵 =𝑃 𝐴 +𝑃 𝐵 −𝑃 𝐴 ∩ 𝐵

 Corollary 2.1: If A and B are mutually

exclusive, then
𝑃 𝐴 𝑜𝑟 𝐵 = 𝑃 𝐴 + 𝑃 𝐵
𝑃 𝐴 ∪𝐵 =𝑃 𝐴 +𝑃 𝐵
Rules
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 Corollary2.2: If 𝐴1 , 𝐴2 , … , 𝐴𝑛 are mutually

exclusive, then

𝑃 𝐴1 ∪ 𝐴2 ∪ ⋯ ∪ 𝐴𝑛
= 𝑃 𝐴1 + 𝑃 𝐴2 + ⋯ + 𝑃 𝐴𝑛

 Corollary
2.3: If 𝐴1 , 𝐴2 , … , 𝐴𝑛 is a partition of
sample space S, then

𝑃 𝐴1 ∪ 𝐴2 ∪ ⋯ ∪ 𝐴𝑛
= 𝑃 𝐴1 + 𝑃 𝐴2 + ⋯ + 𝑃 𝐴𝑛
=𝑃 𝑆 =1
Rules
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 Theorem2.11: For three events A, B, and C

𝑃 𝐴 ∪ 𝐵∪𝐶
=𝑃 𝐴 +𝑃 𝐵 +𝑃 𝐶 −𝑃 𝐴 ∩ 𝐵 −𝑃 𝐴∩𝐶
−𝑃 𝐵∩𝐶 +𝑃 𝐴∩𝐵∩𝐶

 Theorem 2.12: If A and A' are complementary

events, then
𝑃 𝐴 + 𝑃 𝐴′ = 1
Example:
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Suppose probability you will get a grade A in

this class is 0.25 and the probability you will get
a B is 0.50. What is the probability your grade
will be above C?

Answer:
P(above C) = 0.25 + 0.50 = 0.75
Example
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The probabilities of the events A and B are

0.20 and 0.30 respectively. The probability that
both A and B occur is 0.15. What is the
probability of either A or B occurring?

Answer:
P(A or B) = P(A)+P(B) – P(A and B)
= 0.20 + 0.30 – 0.15
= 0.35
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Conditional & Joint Probability

 Definition
2.9: The conditional probability of B,
given A, denoted by 𝑃 𝐵\𝐴 is defined by
𝑃 𝐴∩𝐵
𝑃 𝐵|𝐴 =
𝑃(𝐴)
provided, 𝑃 𝐴 > 0.

 Definition2.10: Two events A and B are

independent if and only if
𝑃 𝐵\𝐴 = 𝑃 𝐵 ; 𝑜𝑟 𝑃 𝐴\𝐵 = 𝑃 𝐴
provided the existences of the conditional
probabilities. Otherwise, A and B are dependent.
Example:
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Each salesperson in Perodua Malaysia is rated

either below average, average, or above
average with respect to sales ability. Each
salesperson is also rated with respect to his or
her potential for advancement-either fair,
good, or excellent. These trait for the 500
salespeople were cross-classified into the
following table.
Example: cont.
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Potential for Advancement

Sales Ability Fair Good Excellent
Below 16 12 22
average
Average 45 60 45
Above 93 72 135
average
a)What is the probability a salesperson selected at
random will have above average sales ability and
excellent potential for advancement? 0.27
b) Construct a tree diagram showing all the
probabilities, conditional probabilities, and joint
probabilities.
Example: cont.
28 SJ13103, 22 September 2016

Potential for Advancement

Sales Fair Good Excellent

Ability (F), 154 (G), 144 (E), 192

Below A∩F A∩G A∩E

average P(A∩F)= 16/500 P(A∩G)= 12/500 P(A∩E)= 22/500
(A)
50
Average B∩F B∩G B∩E
(B) P(B∩F)= 45/500 P(B∩G)= 60/500 P(B∩E)= 45/500
150

Above C∩F C∩G C∩E

average P(C∩F)=93/500 P(C∩G)= 72/500 P(C∩E)= 135/500
(C)
300
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Recap:
Probability – A numerical measure of the likelihood
that an event will occur
Experiment – A process that generates well-defined
outcomes
Sample space – The set of all experimental
outcomes
Sample point – An element of the sample space. A
sample point represents an experimental
outcome.
Event – A collection of sample points.
Tree diagram – A graphical representation that
helps in visualizing a multiple-step experiment
 30 SJ13103, 28 September 2016

Recap:
Basics requirements for assigning probabilities:
a) 0  P(E1) 1
b) P(E1)+ P(E2) + ... + P(En)= 1

Methods:
a) Classical - appropriate when all the experimental
outcomes are equally likely.
b) Relative frequency – data are available to
estimate the proportion of time
c) Subjective – on the basis of judgement
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Recap:
 Complement of A
 Union of A and B
 Intersection of A and B
 Addition Law
 Mutually exclusive events
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Recap:

 Conditional probability – the probability of an

event given that another event already occurred.
 Joint probability – the probability of two events
both occurring
 Independent events – the events have no
influence on each other
 Multiplication Law – a probability law used to
compute the probability of the intersection of two
events.
Example: cont.
33 SJ13103, 28 September 2016

Potential for Advancement

Sales Ability Fair Good Excellent Total
(F), 154 (G), 144 (E), 192
Below A∩F A∩G A∩E
average P(A∩F)= 16/500 P(A∩G)= 12/500 P(A∩E)= 22/500
(A) 0.032 0.024 0.044
0.100
50
Average B∩F B∩G B∩E
(B) P(B∩F)= 45/500 P(B∩G)= 60/500 P(B∩E)= 45/500 0.300
150 0.090 0.120 0.090
Above C∩F C∩G C∩E
average P(C∩F)=93/500 P(C∩G)= 72/500 P(C∩E)=135/500
(C) 0.186 0.144 0.270
0.600
300

Total 0.308 0.288 0.404 1.00

Marginal probabilities – the values in the margins of a joint

probability table that provide the probabilities of each event
separately.
 34 SJ13103, 28 September 2016
Tree diagram:
Step 1: Step 2: Probability of Outcome
Sales Ability Potential for Advancement
F P(A∩F)=P(A).P(F│A)=0.032
P(F│A)=0.32

P(G│A)=0.24 G P(A∩G)=P(A).P(G│A)=0.024
P(A)= 0.100 P(E│A)=0.44
E P(A∩E)=P(A).P(E│A)=0.044

F P(B∩F)=P(B).P(F│B)=0.090
P(F│B)=0.30
P(B)= 0.300 P(G│B)=0.40 G P(B∩G)=P(B).P(G│B)=0.120
P(E│B)=0.30 E P(B∩E)=P(B).P(E│B)=0.090

F P(C∩F)=P(C).P(F│C)=0.186
P(B)= 0.600 P(F│C)=0. 31
P(G│C)=0.24 G P(C∩G)=P(C).P(G│C)=0.144
P(E│C)=0.45
E P(C∩E)=P(C).P(E│C)=0.270
 35 SJ13103, 28 September 2016

Bayes’ Theorem
Prior probabilities – Initial estimates of the
probabilities of events
Posterior probabilities – Revised probabilities
of events based on additional information.
Bayes’ Theorem – A method used to
compute posterior probabilities.

Application
Prior New Prior
of Bayes’
Probabilities Information Probabilities
Theorem
 36 SJ13103, 28 September 2016

Example: Two-cases problem

Consider a manufacturing firm that receives
shipments of parts from two different suppliers. Let
A1 denote the event that a part is from supplier 1
and A2 denote that a part is from supplier 2.
Currently, 65% of the parts purchased by the
company are from supplier 1 and the remaining
35% are from supplier 2.
Let G denote the event that a part is good and B
denote the event that a part is bad.
% Good parts % Bad parts
Supplier 1 98 2
Supplier 2 95 5
 37 SJ13103, 28 September 2016
Tree diagram:
Step 1: Step 2:
Supplier Condition Probability of Outcome
G (A1,G)
A1

B (A1,B)

G (A2,G)

A2
(A2,B)
B
 38 SJ13103, 28 September 2016
Tree diagram:
Step 1: Step 2:
Supplier Condition Probability of Outcome
G
P(G│A1)=0.98
P(A1∩G)=P(A1).P(G│A1)=0.6370
A1

P(A1)= 0.65 P(A1∩B)=P(A1).P(B│A1)=0.0130

P(B│A1)=0.02
B

P(G│A2)=0.95 G
P(A2)= 0.35 P(A2∩G)=P(A2).P(G│A2)=0.3325

A2

P(A2∩B)=P(A2).P(B│A2)=0.0175
P(B│A2)=0.05 B
 39 SJ13103, 28 September 2016

Bayes’ Theorem: When?

Suppose now
 the parts from the two suppliers are used in the
firm’s manufacturing process
 a machine breaks down because it attempts to
process a bad part.

Given the information that the part is bad, what is

the probability that
 it came from supplier 1
 It came from supplier 2
 40 SJ13103, 28 September 2016

Bayes’ Theorem: When?

 41 SJ13103, 28 September 2016

Bayes’ Theorem
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Bayes’ Theorem
 43 SJ13103, 28 September 2016

Bayes’ Theorem: Tabular Approach

STEP 1: Prepare 3 columns
i) Column 1
The mutually exclusive events A, for which
posterior probabilities are desired.
ii) Column 2
The prior probabilities P(Ai) for the events
iii) Column 3
The conditional probabilities P(B│Ai)of the new
information B given each event.
 44 SJ13103, 28 September 2016

Bayes’ Theorem: Tabular Approach

STEP 2: Prepare column 4
Compute the joint probabilities for each event
and the new information using the
multiplication law.

STEP 3: Sum the joint probabilities in column 4.

The sum is the probability of the new
information.

STEP 4: Prepare column 5

Compute the posterior probabilities using the
basic relationship of conditional probability.
 45 SJ13103, 28 September 2016

Bayes’ Theorem: Example

Column 1 Column 2 Column 3 Column 4 Column 5
Prior Conditional Joint Posterior
Events Probabilities Probabilities Probabilities Probabilities

Ai P(Ai) P(B│Ai) P(Ai∩B) P(Ai│B)

0.0130/0.0305
A1 0.65 0.02 0.0130 =0.4262

0.0175/0.0305
A2 0.35 0.05 0.0175 =0.5738

P(B)
1.00 1.0000
=0.0305
 46 SJ13103, 28 September 2016

Exercise:
Refer to the example on Sales Ability and
Potential for advancement.
a) Perform the tabular approach for this
example
b) Find the values of;
a) P( A|F)
b) P(B|G)
c) P(C|E)
d) P(F), P(G), P(E)