Fundamentals of Business

Statistics
Probability Distribution
Dr. P.K.Viswanathan
 What is Probability Distribution?
In precise terms, a probability distribution is a total listing of
the various values the random variable can take along with the
corresponding probability of each value. A real life example
could be the pattern of distribution of the machine breakdowns
in a manufacturing unit.
•The random variable in this example would be the various
values the machine breakdowns could assume.
•The probability corresponding to each value of the breakdown
is the relative frequency of occurrence of the breakdown.
•The probability distribution for this example is constructed by
the actual breakdown pattern observed over a period of time.
Statisticians use the term “observed distribution” of
breakdowns.

Dr. P.K.Viswanathan 2
 Binomial Distribution
•The Binomial Distribution is a widely used probability
distribution of a discrete random variable.

•It plays a major role in quality control and quality assurance

function. Manufacturing units do use the binomial distribution
for defective analysis.

•Reducing the number of defectives using the proportion

defective control chart (p chart) is an accepted practice in
manufacturing organizations.

•Binomial distribution is also being used in service

organizations like banks, and insurance corporations to get an
idea of the proportion customers who are satisfied with the
service quality.

Dr. P.K.Viswanathan 3
 Conditions for Applying Binomial
Distribution (Bernoulli Process)
• Trials are independent and random.
• There are fixed number of trials (n trials).
• There are only two outcomes of the trial
designated as success or failure.
• The probability of success is uniform through
out the n trials

Dr. P.K.Viswanathan 4
 Binomial Probability Function
The probability of getting x successes out of n trials is indeed the definition of a Binomial
Distribution. The Binomial Probability Function is given by the following expression
n x
P(x)    (1   ) n  x x can take values 0, 1, 2, ………., n
x
Where P(x) is the probability of getting x successes in n trials

n
  is the number of ways in which x successes can take place out of n trials
x
n!
=
x!(n  x)!

π is the probability of success, which is the same through out the n trials.
π is the parameter of the Binomial distribution
Dr. P.K.Viswanathan 5
 Example for Binomial Distribution

A bank issues credit cards to customers under the scheme

of Master Card. Based on the past data, the bank has found
out that 60% of all accounts pay on time following the bill. If
a sample of 7 accounts is selected at random from the
current database, construct the Binomial Probability
Distribution of accounts paying on time.

Dr. P.K.Viswanathan 6
Spreadsheet Showing the Solution

Dr. P.K.Viswanathan 7
 Mean and Standard Deviation of the
Binomial Distribution
The mean  of the Binomial Distribution is
given by  = E(x)= nπ

The Standard Deviation  is given by

 = n (1   )

For the example problem in the previous two slides,

Mean =70.6 =4.2.
Standard Deviation = = 1.30
4.2(1  0.60)

Dr. P.K.Viswanathan 8
 Poisson Distribution
Poisson Distribution is another discrete distribution which
also plays a major role in quality control in the context of
reducing the number of defects per standard unit.

•Examples include number of defects per item, number of

defects per transformer produced, number of defects per
100 m2 of cloth, etc.

•Other real life examples would include 1) The number of

cars arriving at a highway check post per hour; 2) The
number of customers visiting a bank per hour during peak
business period.

Dr. P.K.Viswanathan 9
 Poisson Process
• The probability of getting exactly one success in
a continuous interval such as length, area, time
and the like is constant.

• The probability of a success in any one interval

is independent of the probability of success
occurring in any other interval.

• The probability of getting more than one

success in an interval is 0.

Dr. P.K.Viswanathan 10
Poisson Probability Function
Poisson Distribution Formula

eλ λ x
P(x) 
x!
where
P(x) = Probability of x successes given an idea of λ
λ = Average number of successes
e = 2.71828(based on natural logarithm)
x = successes per unit which can take values 0, 1, 2, 3,…………..

λ is the Parameter of the Poisson Distribution.

Mean of the Poisson Distribution is = λ
Standard Deviation of the Poisson Distribution is = λ

Dr. P.K.Viswanathan 11
 Example
If on an average, 6 customers arrive every two minutes at a bank during
the busy hours of working, a) what is the probability that exactly four
customers arrive in a given minute? b) What is the probability that more
than three customers will arrive in a given minute?

6 customers arrive every two minutes. Therefore , 3 customers arrive

every minute. That implies my lambda=3
P(X=4)=?
P(X>3)=? Implies 1-P(X< =3)

Dr. P.K.Viswanathan 12
 Spreadsheet showing Solution

Look at the table and you will find that corresponding to x =4 in column B, the probability
P(x=4) is 0.168031 found in column C. You want P(x > 3) = 1- P(x < = 3) = 1-0.647232 =
0.352768 ( Please note that P(x< = 3) is found in Column D corresponding to the value of x
=3 in column B. You could see 0.647232 in row 8 and column D.

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Normal Distribution

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 Properties of Normal Distribution

• The normal distribution is a continuous distribution looking like a bell. Statisticians use
the expression “Bell Shaped Distribution”.
• It is a beautiful distribution in which the mean, the median, and the mode are all equal
to one another.
• It is symmetrical about its mean.
• If the tails of the normal distribution are extended, they will run parallel to the
horizontal axis without actually touching it. (asymptotic to the x-axis)
• The normal distribution has two parameters namely the mean  and the standard
deviation 

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Normal Probability Density Function
In the usual notation, the probability density
function of the normal distribution is given
below:
 (x μ)2 
 2 
1  
f ( x) 
2σ
e
σ 2π
x is a continuous normal random variable with
the property    x   meaning x can
take all real numbers in the interval    x   .

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 Standard Normal Distribution
The Standard Normal Variable is defined as follows:

x μ
z
Please note that σ
Z is a pure number independent of the unit
of measurement. The random variable Z follows a normal
distribution with mean=0 and standard deviation =1.

 Z2 
 
1  2 
f (Z )  e
2

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 Example Problem
The mean weight of a morning breakfast cereal
pack is 0.295 kg with a standard deviation of
0.025 kg. The random variable weight of the
pack follows a normal distribution.

a) What is the probability that the pack weighs

less than 0.280 kg?
b) What is the probability that the pack weighs
more than 0.350 kg?
c) What is the probability that the pack weighs
between 0.260 kg to 0.340 kg?

Dr. P.K.Viswanathan 18
 Solution-a)

x μ
z = (0.280-0.295)/0.025 = -0.6. Click “Paste Function” of Microsoft Excel,
σ
then click the “statistical” option, then click the standard normal distribution option
and enter the z value. You get the answer. Excel accepts directly both the negative
and positive values of z. Excel always returns the cumulative probability value. When
z is negative, the answer is direct. When z is positive, the answer is =1- the
probability value returned by Excel. The answer for part a) of the question =
0.2743(Direct from Excel since z is negative). This says that 27.43 % of the packs
weigh less than 0.280 kg.

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 Solution-b)

x μ
z = (0.350-0.295)/0.025 =2.2. Excel returns a value of 0.9861. Since z is
σ
positive, the required probability is = 1-0.9861 =0.0139. This means that 1.39% of the
packs weigh more than 0.350 kg.

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 Solution-c)

For this part, you have to first get the cumulative probability up to 0.340 kg and then
x μ
subtract the cumulative probability up to 0.260. z  = (0.340-0.295)/0.025
σ
x μ
=1.8(up to 0.340). z  = (0.260-0.295)/0.025 = -1.4(up to 0.260). These two
σ
probabilities from Excel are 0.9641 and 0.0808 respectively. The answer is = 0.9641-
0.0808 = 0.8833. This means that 88.33% of the packs weigh between 0.260 kg and
0.340 kg.

Dr. P.K.Viswanathan 21
Thinking Problem
• What weight of the pack produced would
have been exceeded by 90% of the packs
produced?