CHAP 1

Statistics in Business
Accounting — auditing and cost estimation
Economics — regional, national, and international economic performance
Finance — investments and portfolio management
Management — human resources, compensation, and quality management
Management Information Systems — performance of systems which gather, summarize, and
disseminate information to various managerial levels
Marketing — market analysis and consumer research
International Business — market and demographic analysis

What is Statistics?
Science of gathering, analyzing, interpreting, and presenting data
Branch of mathematics
Course of study
Facts and figures
A death
Measurement taken on a sample
Type of distribution being used to analyze data

Population Versus Sample

Population — the whole
a collection of persons, objects, or items under study
Census — gathering data from the entire population

Sample — a portion of the whole

a subset of the population

Descriptive vs. Inferential Statistics

Descriptive Statistics — using data gathered on a group to describe or reach conclusions about that
same group only

Inferential Statistics — using sample data to reach conclusions about the population from which the
sample was taken

Parameter vs. Statistic

Parameter — descriptive measure of the population
Usually represented by Greek letters

Statistic — descriptive measure of a sample

Usually represented by Roman letters

Symbols for Population Parameters

 denot es p op ulat ion p arameter

denotes population variance

2
  denotes p op ulation standard deviation

Symbols for Sample Statistics

x denotes samp le mean

denot es samp le variance

S2

S denotes samp le standard deviation

Process of Inferential Statistics

Pop ulat ion ( p aramet er)

Calculat e x t o est imate 

Select a random sample

Sample x (st at ist ic)

Levels of Data Measurement
Nominal — Lowest level of measurement

Ordinal

Interval

Ratio — Highest level of measurement

Nominal Level Data

Numbers are used to classify or categorize
Example: Employment Classification
1 for Educator
2 for Construction Worker
3 for Manufacturing Worker

Example: Ethnicity
1 for African-American
2 for Anglo-American
3 for Hispanic-American

Ordinal Level Data

Numbers are used to indicate rank or order
Relative magnitude of numbers is meaningful
Differences between numbers are not comparable
Example: Ranking productivity of employees
Example: Taste test ranking of three brands of soft drink
Example: Position within an organization
1 for President
2 for Vice President
3 for Plant Manager
4 for Department Supervisor
5 for Employee

Ordinal Data Faculty and staff should receive preferential treatment for parking space. 1 2 3 4 5
Strongly Agree Agree Strongly Disagree Disagree Neutral
Interval Level Data
Distances between consecutive integers are equal
Relative magnitude of numbers is meaningful
Differences between numbers are comparable
Location of origin, zero, is arbitrary
Vertical intercept of unit of measure transform function is not zero
Example: Fahrenheit Temperature
Example: Calendar Time
Example: Monetary Utility
Ratio Level Data
Highest level of measurement
Relative magnitude of numbers is meaningful
Differences between numbers are comparable
Location of origin, zero, is absolute (natural)
Vertical intercept of unit of measure transform function is zero
Examples: Height, Weight, and Volume
Example: Monetary Variables, such as Profit and Loss, Revenues, and Expenses
Example: Financial ratios, such as P/E Ratio, Inventory Turnover, and Quick Ratio.

Usage Potential of Various Levels of Data Nominal Ordinal Interval Ratio

Data Level, Operations, and Statistical Methods

Data Level
Nominal
Ordinal
Interval
Ratio
Meaningful Operations
Classifying and Counting
All of the above plus Ranking
All of the above plus Addition, Subtraction, Multiplication, and Division
All of the above
Statistical Methods
Nonparametric
Nonparametric
Parametric
Parametric
Ungrouped Versus Grouped Data •Ungrouped data
•have not been summarized in any way
•are also called raw data
•Grouped data
•have been organized into a frequency distribution
2-4
Example of Ungrouped Data
42 30 53 50 52 30 55 49 61 74 26 58 40 40
28 36 30 33 31 37 32 37 30 32 23 32 58 43 Range = Largest - Smallest
30 29 34 50 47 31 35 26 64 46 40 43 57 30
= 74 - 23
49 40 25 50 52 32 60 54

Ages of a Sample of Managers from Urban

Child Care Centers in the United States = 51

2-5 Frequency Distribution of Child Care Manager’s Ages

Class Interval Frequency
20-under 30 6
30-under 40 18
40-under 50 11
50-under 60 11
60-under 70 3
70-under 80 1

2-7
Number of Classes and Class Width
•The number of classes should be between 5 and 15.
•Fewer than 5 classes cause excessive summarization.
•More than 15 classes leave too much detail.
•Class Width
• Divide the range by the number of classes for an approximate class width
•Round up to a convenient number

Ap p roximate Class Width =

51
= 8.5
6

Class Widt h = 10
Common Statistical Graphs
•Histogram -- vertical bar chart of frequencies
•Frequency Polygon -- line graph of frequencies
•Ogive -- line graph of cumulative frequencies
•Pie Chart -- proportional representation for categories of a whole
•Stem and Leaf Plot
•Pareto Chart
•Scatter Plot
Discrete vs. Continuous Distributions
•Random Variable -- a variable which contains the outcomes of a chance experiment
•Discrete Random Variable -- the set of all possible values is at most a finite or a countably infinite number of
possible values
–Number of new subscribers to a magazine
–Number of bad checks received by a restaurant
–Number of absent employees on a given day
•Continuous Random Variable -- takes on values at every point over a given interval
–Current Ratio of a motorcycle distributorship
–Elapsed time between arrivals of bank customers
–Percent of the labor force that is unemployed
Some Special Distributions
•Discrete
–binomial
–Poisson
–hypergeometric
•Continuous
–uniform
–normal
–exponential
–t
–chi-square
–F
Requirements for a Discrete Probability Function
• Probabilities are between 0 and 1, inclusively

0  P( X )  1 for all X
• Total of all probabilities equals 1

P( X )  1


ov er all x
Binomial Distribution
•Experiment involves n identical trials
•Each trial has exactly two possible outcomes: success and failure
•Each trial is independent of the previous trials
•p is the probability of a success on any one trial
•q = (1-p) is the probability of a failure on any one trial
•p and q are constant throughout the experiment
•X is the number of successes in the n trials
•Applications
–Sampling with replacement
–Sampling without replacement -- n < 5% N
Binomial Distribution: Development
•Experiment: randomly select, with replacement, two families from the residents of Tiny Town
•Success is ‘Children in Household:’ p = 0.75
•Failure is ‘No Children in Household:’ q = 1- p = 0.25
•X is the number of families in the sample with ‘Children in Household’
Binomial Distribution: Development Continued
•Families A, B, and D have children in the household; family C does not
•Success is ‘Children in Household:’ p = 0.75
•Failure is ‘No Children in Household:’ q = 1- p = 0.25
•X is the number of families in the sample with ‘Children in Household’
Binomial Distribution: Development Continued
•Families A, B, and D have children in the household; family C does not
•Success is ‘Children in Household:’ p = 0.75
•Failure is ‘No Children in Household:’ q = 1- p = 0.25
•X is the number of families in the sample with ‘Children in Household’
Poisson Distribution
•Describes discrete occurrences over a continuum or interval
•A discrete distribution
•Describes rare events
•Each occurrence is independent of any other occurrences.
•The number of occurrences in each interval can vary from zero to infinity.
•The expected number of occurrences must hold constant throughout the experiment.
Poisson Distribution: Applications
•Arrivals at queuing systems
–airports -- people, airplanes, automobiles, baggage
–banks -- people, automobiles, loan applications
–computer file servers -- read and write operations
•Defects in manufactured goods
–number of defects per 1,000 feet of extruded copper wire
–number of blemishes per square foot of painted surface
–number of errors per typed page

Poisson Approximation of the Binomial Distribution

• Binomial probabilities are difficult to calculate when n is large.
• Under certain conditions binomial probabilities may be approximated by Poisson probabilities.
• Poisson approximation

Normal Distribution
•Probably the most widely known and used of all distributions is the normal distribution.
•It fits many human characteristics, such as height, weigh, length, speed, IQ scores, scholastic
achievements, and years of life expectancy, among others.
•Many things in nature such as trees, animals, insects, and others have many characteristics that are
normally distributed.

Normal Distribution
•Many variables in business and industry are also normally distributed. For example variables such as
the annual cost of household insurance, the cost per square foot of renting warehouse space, and
managers’ satisfaction with support from ownership on a five-point scale, amount of fill in soda cans, etc.
•Because of the many applications, the normal distribution is an extremely important distribution.

Normal Distribution
•Discovery of the normal curve of errors is generally credited to mathematician and astronomer Karl
Gauss (1777 – 1855), who recognized that the errors of repeated measurement of objects are often
normally distributed.
•Thus the normal distribution is sometimes referred to as the Gaussian distribution or the normal curve of
errors.
•In addition, some credit were also given to Pierre-Simon de Laplace (1749 – 1827) and Abraham de
Moivre (1667 – 1754) for the discovery of the normal distribution.
Properties of the Normal Distribution
•The normal distribution exhibits the following characteristics:
•It is a continuous distribution.
•It is symmetric about the mean.
•It is asymptotic to the horizontal axis.
•It is unimodal.
•It is a family of curves.
•Area under the curve is 1.
•It is bell-shaped.

Standardized Normal Distribution

•Since there is an infinite number of combinations for  and , then we can generate an infinite family
of curves.
•Because of this, it would be impractical to deal with all of these normal distributions.
•Fortunately, a mechanism was developed by which all normal distributions can be converted into a
single distribution called the z distribution.
•This process yields the standardized normal distribution (or curve).

Standardized Normal Distribution

•The conversion formula for any x value of a given normal distribution is given below. It is called the z-
score.
•A z-score gives the number of standard deviations
that a value x, is above or below the mean.
Standardized Normal Distribution
•If x is normally distributed with a mean of  and a standard deviation of , then the z-score will also
be normally distributed with a mean of 0 and a standard deviation of 1.
•Since we can covert to this standard normal distribution, tables have been generated for this standard
normal distribution which will enable us to determine probabilities for normal variables.
•The tables in the text are set up to give the probabilities between z = 0 and some other z value, z0 say,
which is depicted on the next slide.

Regression and Correlation

•Regression analysis is the process of constructing a mathematical model or function that can be used to
predict or determine one variable by another variable.

•Correlation is a measure of the degree of relatedness of two variables.

Simple Regression Analysis

•bivariate (two variables) linear regression -- the most elementary regression model
–dependent variable, the variable to be predicted, usually called Y
–independent variable, the predictor or explanatory variable, usually called X

Regression Models
Deterministic Regression Model Y = B0 + B1X

Probabilistic Regression Model Y = B0 + B1X + 

0 and B1 are population parameters

0 and B1 are estimated by sample statistics b0 and b1