Introduction To Probability

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EC114 Introduction to Quantitative Economics

2. Introduction to Probability
Department of Economics
University of Essex
18/20 October 2011
EC114 Introduction to Quantitative Economics 2. Introduction to Probability
2/25
Outline
1
Frequency Distributions
2
Basic Probability
Reference: R. L. Thomas, Using Statistics in Economics,
McGraw-Hill, 2005, Prerequisites 2 and 3.
Frequency Distributions 3/25
Sometimes descriptive statistics, such as the mean and
variance, summarise a data set too much.
A frequency distribution is a halfway house between the
raw data and summary statistics.
Table P.4 in Thomas provides a frequency distribution for
the data set on clothing expenditure.
For the 10 observations from lecture 1 we can count the
number of observations that fall into certain ranges or
classes.
Recall that the (ordered) observations were: 1572 1666
1743 2111 2401 2651 2806 2848 3201 3567
Suppose we choose classes of width 250 beginning at
1500 i.e. 15001749, 17501999 etc.
We obtain the following frequency distribution:
Class Frequency
15001749 3
17501999 0
20002249 1
22502499 1
25002749 1
27502999 2
30003249 1
32503499 0
35003749 1
Note that the class frequencies sum to 10 (the number of
data points).
The class 15001749 is the modal class because it has
more observations (3) than any other.
We can also depict the frequency distribution in a
histogram:

1500 1750 2000 2250 2500 2750 3000 3250 3500 3750
Annual expenditure on clothing and footwear ()
3

2

1

0
F
r
e
q
u
e
n
c
y

Note that the areas of the columns are proportional to
frequency, not the heights.
This is important when the classes are of unequal width,
as we can see as follows.
Suppose we combine the rst two and last two classes:
Class Frequency
15001999 3
20002249 1
22502499 1
25002749 1
27502999 2
30003249 1
32503749 1
The rst and last class widths are now twice the size of the
others.
Allowing heights to represent the frequencies overstates
the larger classes:

1500 1750 2000 2250 2500 2750 3000 3250 3500 3750
3

2

1

0
F
r
e
q
u
e
n
c
y

Allowing areas to represent the frequencies provides a
more accurate picture:

1500 1750 2000 2250 2500 2750 3000 3250 3500 3750
3

2

1

0
F
r
e
q
u
e
n
c
y

The shape of the histogram tells us something about the
distribution.
A symmetric distribution has mode=mean=median:

freq
0
0
X
Mean
Median
Mode
A distribution that is skewed to the right often has
mode<median<mean:

freq
0
0
X
Mode Mean
Median
Here, there are some large extreme values that skew the
distribution.
A distribution that is skewed to the left often has
mean<median<mode:

freq
0
0
X
Mode Mean
Median
Here there are some small extreme values.
It is sometimes useful to replace the frequencies of
observations in a distribution by their relative frequencies,
particularly when the number of observations is large.
The relative frequencies are the proportions of the total
number of observations that belong to the various classes.
For our data on clothing expenditure we obtain:
Class Frequency Relative frequency
15001749 3 0.3
17501999 0 0.0
20002249 1 0.1
22502499 1 0.1
25002749 1 0.1
27502999 2 0.2
30003249 1 0.1
32503499 0 0.0
35003749 1 0.1
Basic Probability 13/25
Probabilities
Note that relative frequencies add up to one.
In general, if the frequency in a class is f and the number
of observations is n, then the relative frequency is f /n.
When n become very large we call this a probability.
For example, we might assign the probability of clothing
expenditure being in the range 15001749 is equal to
0.3, or
Pr(X in class 15001749) = 0.3.
Note, however, that the number of observations in our
example is small.
More precisely, we dene a probability as being a limiting
relative frequency.
Suppose an event E has n possibilities/opportunities of
occurring but actually occurs f times.
The probability of E occurring is the value that the relative
frequency f /n approaches as n becomes large.
Mathematically, the probability is the limit of f /n as n tends
to innity:
Pr(E) = lim
n
(f /n).
Suppose we have a fair six-sided die and we roll it 12 times
to obtain the following frequencies:
Outcome 1 2 3 4 5 6
Frequency 2 5 0 2 2 1
Relative frequency 1/6 5/12 0 1/6 1/6 1/12
We would expect the relative frequencies to be close to
1/6.
In the limit, as the number of rolls increases, each relative
frequency would tend to 1/6.
Each outcome in this case is equally likely or has equal
probability e.g.
Pr(Roll a 3) = lim
n
(Number of 3s/n) = 1/6.
Suppose we now roll two six-sided dice; there are 36
possible outcomes, all equally likely.
For example,
Pr(4, 4) = 1/36, Pr(5, 2) = 1/36.
Consider two more complicated events:
E
1
: the sum of the two dice is equal to 10;
E
2
: one of the dice shows a 2.
E
1
is shown in green, E
2
in purple:
1,1 1,2 1,3 1,4 1,5 1,6
2,1 2,2 2,3 2,4 2,5 2,6
3,1 3,2 3,3 3,4 3,5 3,6
4,1 4,2 4,3 4,4 4,5 4,6
5,1 5,2 5,3 5,4 5,5 5,6
6,1 6,2 6,3 6,4 6,5 6,6
All outcomes are equally likely and so
Pr(E
1
) = 3/36 = 1/12 and Pr(E
2
) = 11/36.
Mutually Exclusive Events
Note that the events E
1
and E
2
cant occur at the same
time they are mutually exclusive.
The probability of both E
1
and E
2
occurring is zero:
Pr(E
1
and E
2
) = 0.
However, the probability of either E
1
or E
2
occurring is the
sum of the distinct probabilities:
Pr(E
1
or E
2
) = 3/36 + 11/36 = 14/36.
Venn diagrams are often used to depict the probabilities of
events.
For the mutually exclusive events E
1
and E
2
:

E
1

E
2

However, suppose we have an event
E
3
: one of the dice shows a 6.
We nd that Pr(E
3
) = 11/36 while
Pr(E
1
or E
3
) = 12/36, Pr(E
1
and E
3
) = 2/36 = 1/18.
In this case E
1
and E
3
are non-mutually exclusive events
(the events E
2
and E
3
are also non-mutually exclusive).
The Venn diagram for E
1
and E
3
is:

E
1

1/36

2/36 E
3

9/36

E
1
and E
3

Note that the entire area represents Pr(E
1
or E
3
) while the
shaded area represents Pr(E
1
and E
3
).
The diagram shows that we cant simply write
Pr(E
1
or E
3
) = P(E
1
) + P(E
3
)
because the shaded area would be included twice.
However, we can write
Pr(E
1
or E
3
) = P(E
1
) + P(E
3
) Pr(E
1
and E
3
).
We know that Pr(E
1
) = 3/36, Pr(E
3
) = 11/36 and
Pr(E
1
and E
3
) = 2/36 so that
Pr(E
1
or E
3
) = 3/36 + 11/36 2/36 = 12/36 = 1/3.
Conditional Probabilities
Sometimes we are interested in the probability of an event
given that we know another event has already occurred.
This is known as conditional probability.
Suppose we wish to nd the probability that the sum of the
dice is 10 given that one of the dice is a 6.
This is the probability of E
1
given that E
3
has occurred.
We write
Pr(E
1
|E
3
) =
Pr(E
1
and E
3
)
Pr(E
3
)
i.e. the probability of both events occurring as a proportion
of the probability of E
3
occurring.
We therefore nd that
Pr(E
1
|E
3
) =
2/36
11/36
= 2/11.
By reversing the roles of E
1
and E
3
we obtain:
Pr(E
3
|E
1
) =
Pr(E
3
and E
1
)
Pr(E
1
)
We nd that
Pr(E
3
|E
1
) =
2/36
3/36
= 2/3,
which makes sense because two of the three outcomes in
E
1
coincide with E
3
.
We can use the formula for conditional probabilty to obtain
an expression for Pr(E
1
and E
3
):
Pr(E
1
and E
3
) = Pr(E
1
|E
3
) Pr(E
3
) = Pr(E
3
|E
1
) Pr(E
1
).
Independent Events
An important concept in statistics is that of independence.
Two events are said to be independent if, and only if, the
occurrence or non-occurrence of one has no inuence on
the probability of occurrence of the other.
For example, with a fair die, each roll of the die is
independent of all others.
For independent events E
x
and E
y
it must be the case that
Pr(E
x
|E
y
) = Pr(E
x
) and Pr(E
y
|E
x
) = Pr(E
y
).
It is also true that, for independent events,
Pr(E
x
and E
y
) = Pr(E
x
) Pr(E
y
).
This generalises to more than two independent events:
Pr(E
x
1
and E
x
2
and. . . and E
x
n
) = Pr(E
x
1
)Pr(E
x
2
). . .Pr(E
x
n
).
Summary 25/25
Summary
Frequency distributions and histograms.
Relative frequencies and probabilities.
Venn diagrams; mutually exclusive events; conditional
probabilities; independence.
Next week:
Discrete probability distributions.

Introduction To Probability

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EC114 Introduction to Quantitative Economics

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