CHAP 1 Statistics in Business

Chapter 1 1-1
Statistics for
Business and Economics
Chapter 1
Introduction to Statistics
Copyright © 2013 Pearson Education Ch. 1-1
1.1
Decision Making in an
Uncertain Environment
Everyday decisions are based on incomplete

information
Examples:
 Will the job market be strong when I graduate?

 Will the price of Yahoo stock be higher in six months
than it is now?
 Will interest rates remain low for the rest of the year if
the federal budget deficit is as high as predicted?
Statistics for Business and Economics, 8/e Copyright © 2013 Pearson Education
Chapter 1 1-2
Decision Making in an
Uncertain Environment
(continued)
Data are used to assist decision making
 Statistics is a tool to help process, summarize, analyze,

and interpret data
Key Definitions
 A population is the collection of all items of interest or

under investigation
 N represents the population size
 A sample is an observed subset of the population
 n represents the sample size
 A parameter is a specific characteristic of a population

 A statistic is a specific characteristic of a sample
Chapter 1 1-3
Population vs. Sample
Population Sample
Values calculated using Values computed from

population data are called sample data are called
parameters statistics
Examples of Populations
 Names of all registered voters in the United

States
 Incomes of all families living in Daytona Beach
 Annual returns of all stocks traded on the New
York Stock Exchange
 Grade point averages of all the students in your
university
Chapter 1 1-4
Random Sampling
Simple random sampling is a procedure in which
 each member of the population is chosen strictly by

chance,
 each member of the population is equally likely to be
chosen,
 every possible sample of n objects is equally likely to
be chosen
The resulting sample is called a random sample
Descriptive and Inferential Statistics
Two branches of statistics:

 Descriptive statistics
 Graphical and numerical procedures to summarize
and process data
 Inferential statistics
 Using data to make predictions, forecasts, and
estimates to assist decision making
Chapter 1 1-5
Descriptive Statistics
 Collect data
 e.g., Survey
 Present data
 e.g., Tables and graphs
 Summarize data
 e.g., Sample mean =
X i
Inferential Statistics
 Estimation
 e.g., Estimate the population
mean weight using the sample
mean weight
 Hypothesis testing
 e.g., Test the claim that the
population mean weight is 140
pounds
Inference is the process of drawing conclusions or

making decisions about a population based on
sample results
Chapter 1 1-6
1.2
Classification of Variables
Data
Categorical Numerical
Examples:
 Marital Status
 Are you registered to Discrete Continuous
vote?
 Eye Color Examples: Examples:
(Defined categories or  Number of Children  Weight
groups)  Defects per hour  Voltage
(Counted items) (Measured characteristics)
1.5
Graphs to Describe
Numerical Variables
Numerical Data
Frequency Distributions Stem-and-Leaf

and Display
Cumulative Distributions
Histogram Ogive
Chapter 1 1-7
Frequency Distributions
What is a Frequency Distribution?

 A frequency distribution is a list or a table …
 containing class groupings (categories or
ranges within which the data fall) ...
 and the corresponding frequencies with which
data fall within each class or category
Why Use Frequency Distributions?
 A frequency distribution is a way to

summarize data
 The distribution condenses the raw data
into a more useful form...
 and allows for a quick visual interpretation
of the data
Chapter 1 1-8
Class Intervals
and Class Boundaries
 Each class grouping has the same width

 Determine the width of each interval by
largest number  smallest number
w  interval width 
number of desired intervals
 Use at least 5 but no more than 15-20 intervals

 Intervals never overlap
 Round up the interval width to get desirable
interval endpoints
Frequency Distribution Example
Example: A manufacturer of insulation randomly

selects 20 winter days and records the daily
high temperature
data:
24, 35, 17, 21, 24, 37, 26, 46, 58, 30,
32, 13, 12, 38, 41, 43, 44, 27, 53, 27
Chapter 1 1-9

(continued)
 Sort raw data in ascending order:

12, 13, 17, 21, 24, 24, 26, 27, 27, 30, 32, 35, 37, 38, 41, 43, 44, 46, 53, 58
 Find range: 58 - 12 = 46
 Select number of classes: 5 (usually between 5 and 15)
 Compute interval width: 10 (46/5 then round up)
 Determine interval boundaries: 10 but less than 20, 20 but

less than 30, . . . , 60 but less than 70
 Count observations & assign to classes

(continued)
Data in ordered array:
12, 13, 17, 21, 24, 24, 26, 27, 27, 30, 32, 35, 37, 38, 41, 43, 44, 46, 53, 58
Relative
Interval Frequency Percentage
Frequency
10 but less than 20 3 .15 15
20 but less than 30 6 .30 30
30 but less than 40 5 .25 25
40 but less than 50 4 .20 20
50 but less than 60 2 .10 10
Total 20 1.00 100
Chapter 1 1-10
Histogram
 A graph of the data in a frequency distribution

is called a histogram
 The interval endpoints are shown on the
horizontal axis
 the vertical axis is either frequency, relative
frequency, or percentage
 Bars of the appropriate heights are used to
represent the number of observations within
each class
Histogram Example
Interval Frequency
His togram : Daily High Te m pe rature
10 but less than 20 3
20 but less than 30 6 7 6
6 5
50 but less than 60 2 5 4
Frequency
4 3
3 2
2
1 0 0
(No gaps 0
between 0 0 10 10 2020 30 30 40 40 50 50 60 60 70
bars) Temperature in Degrees
Chapter 1 1-11
Describing Data Numerically

Describing Data Numerically
Central Tendency Variation
Arithmetic Mean Range
Median Interquartile Range
Mode Variance
Standard Deviation
Coefficient of Variation
2.1
Measures of Central Tendency
Overview
Central Tendency
Mean Median Mode
x
i1
i
x
n
Arithmetic Midpoint of Most frequently
average ranked values observed value
(if one exists)
Chapter 1 1-12
Arithmetic Mean
 The arithmetic mean (mean) is the most
common measure of central tendency
 For a population of N values:
N
x
i1
i
x1  x 2    x N Population
μ  values
N N
Population size
 For a sample of size n:

n
x
i1
i
x1  x 2    x n Observed
x  values
n n
Sample size
Arithmetic Mean
(continued)
 The most common measure of central tendency

 Mean = sum of values divided by the number of values
 Affected by extreme values (outliers)
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Mean = 3 Mean = 4
1  2  3  4  5 15 1  2  3  4  10 20
 3  4
5 5 5 5
Chapter 1 1-13
Median
 In an ordered list, the median is the “middle”
number (50% above, 50% below)
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Median = 3 Median = 3
 Not affected by extreme values
Finding the Median
 The location of the median:

th
 n  1
Median position    position in the ordered data
 2 
 If the number of values is odd, the median is the middle number
 If the number of values is even, the median is the average of
the two middle numbers
n 1
 Note that is not the value of the median, only the
2
position of the median in the ranked data
Chapter 1 1-14
Mode
 A measure of central tendency
 Value that occurs most often
 Not affected by extreme values
 Used for either numerical or categorical data
 There may be no mode
 There may be several modes
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 0 1 2 3 4 5 6
No Mode
Mode = 9
Review Example
 Five houses on a hill by the beach

$2,000 K
House Prices:
$2,000,000
500,000 $500 K
300,000 $300 K
100,000
100,000
$100 K
$100 K
Chapter 1 1-15
Review Example:
Summary Statistics
House Prices:
 Mean: ($3,000,000/5)
$2,000,000 = $600,000
500,000
300,000
100,000
100,000  Median: middle value of ranked data
Sum 3,000,000
= $300,000
 Mode: most frequent value

= $100,000
Which measure of location

is the “best”?
 Mean is generally used, unless extreme

values (outliers) exist . . .
 Then median is often used, since the median
is not sensitive to extreme values.
 Example: Median home prices may be reported for
a region – less sensitive to outliers
Chapter 1 1-16
Shape of a Distribution
 Describes how data are distributed

 Measures of shape
 Symmetric or skewed
Left-Skewed Symmetric Right-Skewed

Mean < Median Mean = Median Median < Mean
Geometric Mean
 Geometric mean
 Used to measure the rate of change of a variable
over time
x g  n (x1  x 2    x n )  (x1  x 2    x n )1/n

 Geometric mean rate of return
 Measures the status of an investment over time
rg  (x1  x 2  ...  x n )1/n  1

 Where xi is the rate of return in time period i
Chapter 1 1-17
Example
An investment of $100,000 rose to $150,000 at the

end of year one and increased to $180,000 at end
of year two:
X1  $100,000 X2  $150,000 X3  $180,000
50% increase 20% increase
What is the mean percentage return over time?
Example
(continued)
Use the 1-year returns to compute the arithmetic

mean and the geometric mean:
Arithmetic (50%)  (20%)

mean rate X  35% Misleading result
2
of return:
Geometric rg  (x1  x 2 )1/n  1

mean rate
 [(50)  (20)]1/2  1
of return: Accurate
 (1000)1/2  1  31.623  1  30.623% result
Chapter 1 1-18
2.2
Measures of Variability
Variation
Range Interquartile Variance Standard Coefficient of

Range Deviation Variation
 Measures of variation give

information on the spread
or variability of the data
values.
Same center,
different variation
Chapter 1 1-19
Population Variance
 Average of squared deviations of values from

the mean
N
Population variance: 2

 (x  μ)
i
σ2  i1
N
Where μ = population mean
N = population size
xi = ith value of the variable x
Sample Variance
 Average (approximately) of squared deviations

of values from the mean
n
Sample variance: 2

 (x  x)i
s2  i1
n -1
Where X = arithmetic mean
n = sample size
Xi = ith value of the variable X
Chapter 1 1-20
Population Standard Deviation
 Most commonly used measure of variation

 Shows variation about the mean
 Has the same units as the original data
 Population standard deviation:
N
2
 (x  μ)
i1
i
σ
N
Sample Standard Deviation
 Most commonly used measure of variation

 Shows variation about the mean
 Has the same units as the original data
 Sample standard deviation: n

2
 (x  x)
i1
i
S
n -1
Chapter 1 1-21
Calculation Example:
Sample Standard Deviation
Sample
Data (xi) : 10 12 14 15 17 18 18 24
n=8 Mean = x = 16
(10  X ) 2  (12  x ) 2  (14  x ) 2    (24  x ) 2

s 
n 1
2 2 2 2
(10  16)  (12  16)  (14  16)    (24  16)

8 1
130 A measure of the “average”

  4.3095
7 scatter around the mean
Measuring variation
Small standard deviation
Large standard deviation
Chapter 1 1-22
Comparing Standard Deviations

Mean = 15.5 for each data set
11 12 13 14 15 16 17 18 19 20 21
s = 3.338
(compare to the two
Data A cases below)
11 12 13 14 15 16 17 18 19 20 21
s = 0.926
(values are concentrated
Data B near the mean)
s = 4.570
11 12 13 14 15 16 17 18 19 20 21 (values are dispersed far
Data C from the mean)
Advantages of Variance and

Standard Deviation
Chapter 1 1-23
Coefficient of Variation
 Measures relative variation
 Always in percentage (%)
 Shows variation relative to mean
 Can be used to compare two or more sets of
data measured in different units
Population coefficient of Sample coefficient of
variation: variation:
σ   s 
CV     100% CV     100%
μ   x 
Comparing Coefficient
of Variation
 Stock A:
 Average price last year = $50
 Standard deviation = $5
s  $5
CVA    100%  100%  10%
x  $50 Both stocks
 Stock B: have the same
standard
 Average price last year = $100 deviation, but
stock B is less
 Standard deviation = $5 variable relative
to its price
s  $5
CVB    100%  100%  5%
x  $100
Chapter 1 1-24
Chebychev’s Theorem
 For any population with mean μ and

standard deviation σ , and k > 1 , the
percentage of observations that fall within
the interval
[μ + kσ]
Is at least
100[1 (1/k 2 )]%
Chebychev’s Theorem
(continued)
 Regardless of how the data are distributed, at

least (1 - 1/k2) of the values will fall within k
standard deviations of the mean (for k > 1)
 Examples:
At least within
(1 - 1/1.52) = 55.6% ……... k = 1.5 (μ ± 1.5σ)
(1 - 1/22) = 75% …........... k = 2 (μ ± 2σ)
(1 - 1/32) = 89% …….…... k = 3 (μ ± 3σ)
Chapter 1 1-25
The Empirical Rule
 If the data distribution is bell-shaped, then

the interval:
 μ  1σ contains about 68% of the values in
the population or the sample
68%
μ
μ  1σ
The Empirical Rule

(continued)
 μ  2σ contains about 95% of the values in
the population or the sample
 μ  3σ contains almost all (about 99.7%) of
the values in the population or the sample
95% 99.7%
μ  2σ μ  3σ
Chapter 1 1-26
The Empirical Rule
The Empirical Rule
Chapter 1 1-27
z-Score
A z-score shows the position of a value

relative to the mean of the distribution.
 indicates the number of standard deviations a
value is from the mean.
 A z-score greater than zero indicates that the value is
greater than the mean
 a z-score less than zero indicates that the value is
less than the mean
 a z-score of zero indicates that the value is equal to
the mean.
z-Score
(continued)
 If the data set is the entire population of data

and the population mean, µ, and the population
standard deviation, σ, are known, then for each
value, xi, the z-score associated with xi is
xi - μ
z
σ
Chapter 1 1-28
z-Score
(continued)
2.4
Measures of Relationships
Between Variables
Two measures of the relationship between

variable are
 Covariance
 Correlation Coefficient
Chapter 1 1-29
Covariance
 The population covariance:
N
 (x  
i1
i x )(yi   y )
Cov (x , y)   xy 
N
 The sample covariance:
n
 (x  x)(y  y)
i1
i i
Cov (x , y)  s xy 
n 1
 Only concerned with the strength of the relationship
 No causal effect is implied
Interpreting Covariance
 Covariance between two variables:
Cov(x,y) > 0 x and y tend to move in the same direction
Cov(x,y) < 0 x and y tend to move in opposite directions
Cov(x,y) = 0 x and y are independent
Chapter 1 1-30
Coefficient of Correlation
 Measures the relative strength of the linear relationship
between two variables
 Population correlation coefficient:

Cov (x , y)
ρ
σXσY
 Sample correlation coefficient:
Cov (x , y)
r
sX sY
Features of
Correlation Coefficient, r
 Unit free
 Ranges between –1 and 1
 The closer to –1, the stronger the negative linear
relationship
 The closer to 1, the stronger the positive linear
relationship
 The closer to 0, the weaker any positive linear
relationship
Chapter 1 1-31
Scatter Plots of Data with Various

Correlation Coefficients
Y Y Y
X X X
r = -1 r = -.6 r=0
Y
Y Y
X X X
r = +1 r = +.3 r=0

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CHAP 1 Statistics in Business

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Chapter 1 1-1

Copyright © 2013 Pearson Education Ch. 1-1

Everyday decisions are based on incomplete

 Will the job market be strong when I graduate?

Copyright © 2013 Pearson Education Ch. 1-2

Data are used to assist decision making

 Statistics is a tool to help process, summarize, analyze,

Copyright © 2013 Pearson Education Ch. 1-3

 A population is the collection of all items of interest or

 A parameter is a specific characteristic of a population

Copyright © 2013 Pearson Education Ch. 1-4

Population vs. Sample

Values calculated using Values computed from

 Names of all registered voters in the United

Copyright © 2013 Pearson Education Ch. 1-6

Simple random sampling is a procedure in which

 each member of the population is chosen strictly by

The resulting sample is called a random sample

Copyright © 2013 Pearson Education Ch. 1-7

Descriptive and Inferential Statistics

Two branches of statistics:

Copyright © 2013 Pearson Education Ch. 1-8

Copyright © 2013 Pearson Education Ch. 1-9

Inference is the process of drawing conclusions or

Copyright © 2013 Pearson Education Ch. 1-11

Frequency Distributions Stem-and-Leaf

Copyright © 2013 Pearson Education Ch. 1-12

What is a Frequency Distribution?

Copyright © 2013 Pearson Education Ch. 1-13

Why Use Frequency Distributions?

 A frequency distribution is a way to

Copyright © 2013 Pearson Education Ch. 1-14

 Each class grouping has the same width

 Use at least 5 but no more than 15-20 intervals

Copyright © 2013 Pearson Education Ch. 1-15

Frequency Distribution Example

Example: A manufacturer of insulation randomly

Copyright © 2013 Pearson Education Ch. 1-16

Frequency Distribution Example

 Sort raw data in ascending order:

 Determine interval boundaries: 10 but less than 20, 20 but

 Count observations & assign to classes

Copyright © 2013 Pearson Education Ch. 1-17

Frequency Distribution Example

 A graph of the data in a frequency distribution

Describing Data Numerically

Central Tendency Variation

Arithmetic Mean Range

Median Interquartile Range

Copyright © 2013 Pearson Education Ch. 2-21

Mean Median Mode

 For a sample of size n:

 The most common measure of central tendency

Copyright © 2013 Pearson Education Ch. 2-24

 Not affected by extreme values

Copyright © 2013 Pearson Education Ch. 2-25

Finding the Median

 The location of the median:

Copyright © 2013 Pearson Education Ch. 2-26

 Five houses on a hill by the beach

Copyright © 2013 Pearson Education Ch. 2-28

 Mode: most frequent value

Copyright © 2013 Pearson Education Ch. 2-29

Which measure of location