Supply Chain Program Pre-Reads

Supply Chain Program Pre-Reads

/ Supply Chain Program Pre-Reads

This document contains the basic Statistics content that can be needed
during your supply chain certification program.
Please go through it before starting the Program.
This material can also be used during the program for your reference.
 Supply Chain Program Pre-Reads

Supply Chain Program Pre-Reads

Introduction

You are probably asking yourself the question, "When and where will I use statistics?" If you read any newspaper,
watch television, or use the Internet, you will see statistical information. There are statistics about crime, sports,
education, politics, and real estate. Typically, when you read a newspaper article or watch a television news
program, you are given sample information. With this information, you may make a decision about the correctness
of a statement, claim, or "fact." Statistical methods can help you make the "best educated guess."

Since you will undoubtedly be given statistical information at some point in your life, you need to know some
techniques for analysing the information thoughtfully. Think about buying a house or managing a budget. Think
about your chosen profession. The fields of economics, business, psychology, education, biology, law, computer
science, police science, and early childhood development require at least one course in statistics.

Included in this chapter are the basic ideas and words of probability and statistics. You will soon understand that
statistics and probability work together. You will also learn how data are gathered and what "good" data can be
distinguished from "bad."
The science of statistics deals with the collection, analysis, interpretation, and presentation of data. We see and
use data in our everyday lives.

In this course, you will learn how to organize and summarize data. Organizing and summarizing data is called
descriptive statistics. Two ways to summarize data are by graphing and by using numbers (for example, finding
an average). After you have studied probability and probability distributions, you will use formal methods for
drawing conclusions from "good" data. The formal methods are called inferential statistics. Statistical inference
uses probability to determine how confident we can be that our conclusions are correct.

Effective interpretation of data (inference) is based on good procedures for producing data and thoughtful
examination of the data. You will encounter what will seem to be too many mathematical formulas for interpreting
data. The goal of statistics is not to perform numerous calculations using the formulas, but to gain an understanding
of your data. The calculations can be done using a calculator or a computer. The understanding must come from
you. If you can thoroughly grasp the basics of statistics, you can be more confident in the decisions you make in
life.
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Supply Chain Program Pre-Reads

Probability
Probability is a mathematical tool used to study randomness. It deals with the chance (the likelihood) of an event
occurring. For example, if you toss a fair coin four times, the outcomes may not be two heads and two tails.
However, if you toss the same coin 4,000 times, the outcomes will be close to half heads and half tails. The
expected theoretical probability of heads in any one toss is ½ or 0.5. Even though the outcomes of a few repetitions
are uncertain, there is a regular pattern of outcomes when there are many repetitions. After reading about the
English statistician Karl Pearson who tossed a coin 24,000 times with a result of 12,012 heads, one of the authors
tossed a coin 2,000 times. The results were 996 heads. The fraction 996/2000 is equal to 0.498 which is very close
to 0.5, the expected probability.

The theory of probability began with the study of games of chance such as poker. Predictions take the form of
probabilities. To predict the likelihood of an earthquake, of rain, or whether you will get an A in this course, we use
probabilities. Doctors use probability to determine the chance of a vaccination causing the disease the vaccination
is supposed to prevent. A stockbroker uses probability to determine the rate of return on a client's investments.
You might use probability to decide whether to buy a lottery ticket or not. In your study of statistics, you will use
the power of mathematics through probability calculations to analyze and interpret your data.
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Supply Chain Program Pre-Reads

Key Terminologies

In statistics, we generally want to study a population. You can think of a population as a collection
of persons, things, or objects under study. To study the population, we select a sample.

The idea of sampling is to select a portion (or subset) of the larger population and study that portion
(the sample) to gain information about the population. Data are the result of sampling from a
population.
Because it takes a lot of time and money to examine an entire population, sampling is a very practical
technique. If you wished to compute the overall grade point average at your school, it would make
sense to select a sample of students who attend the school. The data collected from the sample
would be the students' grade point averages.

In presidential elections, opinion poll samples of 1,000–2,000 people are taken. The opinion poll is
supposed to represent the views of the people in the entire country. Manufacturers of canned
carbonated drinks take samples to determine if a 16 ounce can contains 16 ounces of carbonated
drink.From the sample data, we can calculate a statistic.

A statistic is a number that represents a property of the sample. For example, if we consider one
math class to be a sample of the population of all math classes, then the average number of points
earned by students in that one math class at the end of the term is an example of a statistic. The
statistic is an estimate of a population parameter, in this case the mean.

A parameter is a numerical characteristic of the whole population that can be estimated by a statistic.
Since we considered all math classes to be the population, then the average number of points
earned per student over all the math classes is an example of a parameter.

One of the main concerns in the field of statistics is how accurately a statistic estimates a parameter.
The accuracy really depends on how well the sample represents the population. The sample must
contain the characteristics of the population in order to be a representative sample.
We are interested in both the sample statistic and the population parameter in inferential statistics.

A variable, or random variable, usually notated by capital letters such as X and Y, is a characteristic
or measurement that can be determined for each member of a population. Variables may be
numerical or categorical. Numerical variables take on values with equal units such as weight in
pounds and time in hours. Categorical variables place the person or thing into a category.

If we let X equal the number of points earned by one math student at the end of a term, then X is a
numerical variable. If we let Y be a person's party affiliation, then some examples of Y include
Republican, Democrat, and Independent. Y is a categorical variable. We could do some math with
values of X (calculate the average number of points earned, for example), but it makes no sense to
do math with values of Y (calculating an average party affiliation makes no sense).
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Supply Chain Program Pre-Reads

Key Terminologies
Data are the actual values of the variable. They may be numbers or they may be words. Datum is a single value.

Two words that come up often in statistics are mean and proportion. If you were to take three exams in your math
classes and obtain scores of 86, 75, and 92, you would calculate your mean score by adding the three exam
scores and dividing by three (your mean score would be 84.3 to one decimal place). If, in your math class, there
are 40 students and 22 are men and 18 are women, then the proportion of men students is 22/40 and the proportion
of women students is 18/40

NOTE
The words "mean" and "average" are often used interchangeably. The substitution of one word for the other is
common practice. The technical term is "arithmetic mean," and "average" is technically a center location.
However, in practice among non-statisticians, "average" is commonly accepted for "arithmetic mean."

EXAMPLE

Determine what the key terms refer to in the following study. We want to know the average (mean) amount of
money first year college students spend at ABC College on school supplies that do not include books. We
randomly surveyed 100 first year students at the college. Three of those students spent $150, $200, and $225,
respectively.

Solution

The population is all first year students attending ABC College this term.

The sample could be all students enrolled in one section of a beginning statistics course at ABC College
(although this sample may not represent the entire population).

The parameter is the average (mean) amount of money spent (excluding books) by first year college students at
ABC College this term: the population mean.

The statistic is the average (mean) amount of money spent (excluding books) by first year college students in
the sample.

The variable could be the amount of money spent (excluding books) by one first year student. Let X = the
amount of money spent (excluding books) by one first year student attending ABC College.

The data are the dollar amounts spent by the first year students. Examples of the data are $150, $200, and
$225.
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Supply Chain Program Pre-Reads

Data
Data may come from a population or from a sample. Lowercase letters like x or generally are used to represent
data values. Most data can be put into the following categories:
 Qualitative
 Quantitative
Qualitative data are the result of categorizing or describing attributes of a population. Qualitative data are also
often called categorical data. Hair color, blood type, ethnic group, the car a person drives, and the street a person
lives on are examples of qualitative(categorical) data. Qualitative(categorical) data are generally described by
words or letters. For instance, hair color might be black, dark brown, light brown, blonde, gray, or red. Blood type
might be AB+, O-, or B+. Researchers often prefer to use quantitative data over qualitative(categorical) data
because it lends itself more easily to mathematical analysis. For example, it does not make sense to find an
average hair color or blood type.
Quantitative data are always numbers. Quantitative data are the result of counting or measuring attributes of a
population. Amount of money, pulse rate, weight, number of people living in your town, and number of students
who take statistics are examples of quantitative data. Quantitative data may be either discrete or continuous.
All data that are the result of counting are called quantitative discrete data. These data take on only certain
numerical values. If you count the number of phone calls you receive for each day of the week, you might get
values such as zero, one, two, or three.
Data that are not only made up of counting numbers, but that may include fractions, decimals, or irrational
numbers, are called quantitative continuous data. Continuous data are often the results of measurements like
lengths, weights, or times. A list of the lengths in minutes for all the phone calls that you make in a week, with
numbers like 2.4, 7.5, or 11.0, would be quantitative continuous data.

EXAMPLES

1. Data Sample of Quantitative Discrete Data

The data are the number of books students carry in their backpacks. You sample five students. Two students
carry three books, one student carries four books, one student carries two books, and one student carries one
book. The numbers of books (three, four, two, and one) are the quantitative discrete data.

2. Data Sample of Quantitative Continuous Data

The data are the weights of backpacks with books in them. You sample the same five students. The weights (in
pounds) of their backpacks are 6.2, 7, 6.8, 9.1, 4.3. Notice that backpacks carrying three books can have
different weights. Weights are quantitative continuous data.
Once you have a set of data, you will need to organize it so that you can analyze how frequently each datum
occurs in the set. However, when calculating the frequency, you may need to round your answers so that they
are as precise as possible.

Once you have a set of data, you will need to organize it so that you can analyze how frequently each datum
occurs in the set. However, when calculating the frequency, you may need to round your answers so that they are
as precise as possible.
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Supply Chain Program Pre-Reads

Levels of Measurement

The way a set of data is measured is called its level of measurement. Correct statistical procedures depend on
a researcher being familiar with levels of measurement. Not every statistical operation can be used with every set
of data. Data can be classified into four levels of measurement. They are (from lowest to highest level):

 Nominal scale level

 Ordinal scale level
 Interval scale level
 Ratio scale level
Data that is measured using a nominal scale is qualitative (categorical). Categories, colors, names, labels and
favorite foods along with yes or no responses are examples of nominal level data. Nominal scale data are not
ordered. For example, trying to classify people according to their favorite food does not make any sense. Putting
pizza first and sushi second is not meaningful.
Smartphone companies are another example of nominal scale data. The data are the names of the companies
that make smartphones, but there is no agreed upon order of these brands, even though people may have personal
preferences. Nominal scale data cannot be used in calculations.
Data that is measured using an ordinal scale is similar to nominal scale data but there is a big difference. The
ordinal scale data can be ordered. An example of ordinal scale data is a list of the top five national parks in the
United States. The top five national parks in the United States can be ranked from one to five but we cannot
measure differences between the data.
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Supply Chain Program Pre-Reads

Probability Introduction

It is often necessary to "guess" about the outcome of an event in order to make a decision. Politicians study polls
to guess their likelihood of winning an election. Teachers choose a particular course of study based on what they
think students can comprehend. Doctors choose the treatments needed for various diseases based on their
assessment of likely results. You may have visited a casino where people play games chosen because of the
belief that the likelihood of winning is good. You may have chosen your course of study based on the probable
availability of jobs.

You have, more than likely, used probability. In fact, you probably have an intuitive sense of probability. Probability
deals with the chance of an event occurring. Whenever you weigh the odds of whether or not to do your homework
or to study for an exam, you are using probability. In this chapter, you will learn how to solve probability problems
using a systematic approach.

Probability is a measure that is associated with how certain we are of outcomes of a particular experiment or
activity. An experiment is a planned operation carried out under controlled conditions. If the result is not
predetermined, then the experiment is said to be a chance experiment. Flipping one fair coin twice is an example
of an experiment.

A result of an experiment is called an outcome. The sample space of an experiment is the set of all possible
outcomes. Three ways to represent a sample space are: to list the possible outcomes, to create a tree diagram,
or to create a Venn diagram. The uppercase letter S is used to denote the sample space. For example, if you flip
one fair coin, S = {H, T} where H = heads and T = tails are the outcomes.

An event is any combination of outcomes. Upper case letters like A and B represent events. For example, if the
experiment is to flip one fair coin, event A might be getting at most one head. The probability of an event A is
written P(A).

The probability of any outcome is the long-term relative frequency of that outcome. Probabilities are between
zero and one, inclusive (that is, zero and one and all numbers between these values). P(A) = 0 means the event
A can never happen. P(A) = 1 means the event A always happens. P(A) = 0.5 means the event A is equally likely
to occur or not to occur. For example, if you flip one fair coin repeatedly (from 20 to 2,000 to 20,000 times) the
relative frequency of heads approaches 0.5 (the probability of heads).

Equally likely means that each outcome of an experiment occurs with equal probability. For example, if you toss
a fair, six-sided die, each face (1, 2, 3, 4, 5, or 6) is as likely to occur as any other face. If you toss a fair coin, a
Head (H) and a Tail (T) are equally likely to occur. If you randomly guess the answer to a true/false question on
an exam, you are equally likely to select a correct answer or an incorrect answer.
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Discrete Random Variable

A student takes a ten-question, true-false quiz. Because the student had such a busy schedule, he or she could
not study and guesses randomly at each answer. What is the probability of the student passing the test with at
least a 70%?
Small companies might be interested in the number of long-distance phone calls their employees make during the
peak time of the day. Suppose the historical average is 20 calls. What is the probability that the employees make
more than 20 long-distance phone calls during the peak time?
These two examples illustrate two different types of probability problems involving discrete random variables.
Recall that discrete data are data that you can count, that is, the random variable can only take on whole number
values. A random variable describes the outcomes of a statistical experiment in words. The values of a random
variable can vary with each repetition of an experiment, often called a trial.
Random Variable Notation
The upper case letter X denotes a random variable. Lower case letters like x or y denote the value of a random
variable. If X is a random variable, then X is written in words, and x is given as a number.
For example, let X = the number of heads you get when you toss three fair coins. The sample space for the toss
of three fair coins is TTT; THH; HTH; HHT; HTT; THT; TTH; HHH. Then, x = 0, 1, 2, 3. X is in words and x is a
number. Notice that for this example, the x values are countable outcomes. Because you can count the possible
values as whole numbers that X can take on and the outcomes are random (the x values 0, 1, 2, 3), X is a discrete
random variable.
Probability Density Functions (PDF) for a Random Variable
A probability density function or probability distribution function has two characteristics:
1. Each probability is between zero and one, inclusive.
2. The sum of the probabilities is one.

A probability density function is a mathematical formula that calculates probabilities for specific types of events,
what we have been calling experiments. There is a sort of magic to a probability density function (Pdf) partially
because the same formula often describes very different types of events. For example, the binomial Pdf will
calculate probabilities for flipping coins, yes/no questions on an exam, opinions of voters in an up or down opinion
poll, indeed any binary event. Other probability density functions will provide probabilities for the time until a part
will fail, when a customer will arrive at the turnpike booth, the number of telephone calls arriving at a central
switchboard, the growth rate of a bacterium, and on and on. There are whole families of probability density
functions that are used in a wide variety of applications, including medicine, business and finance, physics and
engineering, among others.
For our needs here we will concentrate on only a few probability density functions as we develop the tools of
inferential statistics.
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Supply Chain Program Pre-Reads

Continuous Random Variable

Continuous random variables have many applications. Baseball batting averages, IQ scores, the length of time a
long distance telephone call lasts, the amount of money a person carries, the length of time a computer chip lasts,
rates of return from an investment, and SAT scores are just a few. The field of reliability depends on a variety of
continuous random variables, as do all areas of risk analysis.

NOTE
The values of discrete and continuous random variables can be ambiguous. For example, if X is equal to
the number of miles (to the nearest mile) you drive to work, then X is a discrete random variable. You
count the miles. If X is the distance you drive to work, then you measure values of X and X is a continuous
random variable. For a second example, if X is equal to the number of books in a backpack, then X is a
discrete random variable. If X is the weight of a book, then X is a continuous random variable because
weights are measured. How the random variable is defined is very important.

The graph of a continuous probability distribution is a curve. Probability is represented by the area under the curve.
The relative area for a range of values was the probability of drawing at random an observation in that group. In
this case, we were being a bit casual because the random variables of a Poisson distribution are discrete, whole
numbers, and a box has width. Notice that the horizontal axis, the random variable x, purposefully did not mark
the points along the axis. The probability of a specific value of a continuous random variable will be zero because
the area under a point is zero. Probability is area.
The curve is called the probability density function (abbreviated as pdf). We use the symbol f(x) to represent
the curve. f(x) is the function that corresponds to the graph; we use the density function f(x) to draw the graph of
the probability distribution.
Area under the curve is given by a different function called the cumulative distribution function (abbreviated
as cdf). The cumulative distribution function is used to evaluate probability as area. Mathematically, the cumulative
probability density function is the integral of the pdf, and the probability between two values of a continuous random
variable will be the integral of the pdf between these two values: the area under the curve between these values.
Remember that the area under the pdf for all possible values of the random variable is one, certainty. Probability
thus can be seen as the relative percent of certainty between the two values of interest.
 The outcomes are measured, not counted.
 The entire area under the curve and above the x-axis is equal to one.
 Probability is found for intervals of x values rather than for individual x values.
 P(c < x < d) is the probability that the random variable X is in the interval between the values c and d. P(c <
x < d) is the area under the curve, above the x-axis, to the right of c and the left of d.
 P(x = c) = 0 The probability that x takes on any single individual value is zero. The area below the curve,
above the x-axis, and between x = c and x = c has no width, and therefore no area (area = 0). Since the
probability is equal to the area, the probability is also zero.
 P(c < x < d) is the same as P(c ≤ x ≤ d) because probability is equal to area.
We will find the area that represents probability by using geometry, formulas, technology, or probability tables. In
general, integral calculus is needed to find the area under the curve for many probability density functions. When
we use formulas to find the area in this textbook, the formulas were found by using the techniques of integral
calculus.
There are many continuous probability distributions. When using a continuous probability distribution to model
probability, the distribution used is selected to model and fit the particular situation in the best way.
In this chapter and the next, we will study the uniform distribution, the exponential distribution, and the normal
distribution.
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Supply Chain Program Pre-Reads

Normal distribution
The normal probability density function, a continuous distribution, is the most important of all the distributions. It is
widely used and even more widely abused. Its graph is bell-shaped. You see the bell curve in almost all disciplines.
Some of these include psychology, business, economics, the sciences, nursing, and, of course, mathematics.
Some of your instructors may use the normal distribution to help determine your grade. Most IQ scores are
normally distributed. Often real-estate prices fit a normal distribution.

The normal distribution is extremely important, but it cannot be applied to everything in the real world. Remember
here that we are still talking about the distribution of population data. This is a discussion of probability and thus it
is the population data that may be normally distributed, and if it is, then this is how we can find probabilities of
specific events just as we did for population data that may be binomially distributed or Poisson distributed. This
caution is here because in the next chapter we will see that the normal distribution describes something very
different from raw data and forms the foundation of inferential statistics.

The normal distribution has two parameters (two numerical descriptive measures): the mean (μ) and the standard
deviation (σ). If X is a quantity to be measured that has a normal distribution with mean (μ) and standard deviation
(σ), we designate this by writing the following formula of the normal probability density function:
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Supply Chain Program Pre-Reads

The standard normal distribution is a normal distribution of standardized values called z-scores. A z-score
is measured in units of the standard deviation.

The mean for the standard normal distribution is zero, and the standard deviation is one. What this does is
dramatically simplify the mathematical calculation of probabilities. Take a moment and substitute zero and one in
the appropriate places in the above formula and you can see that the equation collapses into one that can be
much more easily solved using integral calculus. The transformation z = x−μ/σ produces the
distribution Z ~ N(0, 1). The value x in the given equation comes from a known normal distribution with known
mean μ and known standard deviation σ. The z-score tells how many standard deviations a particular x is away
from the mean.

Z-Scores

If X is a normally distributed random variable and X ~ N(μ, σ), then the z-score for a particular x is:

The z-score tells you how many standard deviations the value x is above (to the right of) or below (to the
left of) the mean, μ. Values of x that are larger than the mean have positive z-scores, and values of x that are
smaller than the mean have negative z-scores. If x equals the mean, then x has a z-score of zero.

The shaded area in the following graph indicates the area to the right of x. This area is represented by the
probability P(X > x). Normal tables provide the probability between the mean, zero for the standard normal
distribution, and a specific value such as x1x1. This is the unshaded part of the graph from the mean to x1x1.

Because the normal distribution is symmetrical , if x1x1 were the same distance to the left of the mean the area,
probability, in the left tail, would be the same as the shaded area in the right tail. Also, bear in mind that because
of the symmetry of this distribution, one-half of the probability is to the right of the mean and one-half is to the left
of the mean.
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Calculations of Probabilities

To find the probability for probability density functions with a continuous random variable we need to calculate
the area under the function across the values of X we are interested in. For the normal distribution this seems a
difficult task given the complexity of the formula. There is, however, a simply way to get what we want. Here
again is the formula for the normal distribution:

Looking at the formula for the normal distribution it is not clear just how we are going to solve for the probability
doing it the same way we did it with the previous probability functions. There we put the data into the formula
and did the math.

To solve this puzzle we start knowing that the area under a probability density function is the probability.

This shows that the area between X1 and X2 is the probability as stated in the formula: P (X1 ≤ x ≤ X2)
The mathematical tool needed to find the area under a curve is integral calculus. The integral of the normal
probability density function between the two points x1 and x2 is the area under the curve between these two points
and is the probability between these two points.
Doing these integrals is no fun and can be very time consuming. But now, remembering that there are an infinite
number of normal distributions out there, we can consider the one with a mean of zero and a standard deviation
of 1. This particular normal distribution is given the name Standard Normal Distribution. Putting these values into
the formula it reduces to a very simple equation. We can now quite easily calculate all probabilities for any value
of x, for this particular normal distribution, that has a mean of zero and a standard deviation of 1. These have been
produced and are available here in the appendix to the text or everywhere on the web. They are presented in
various ways. The table in this text is the most common presentation and is set up with probabilities for one-half
the distribution beginning with zero, the mean, and moving outward. The shaded area in the graph at the top of
the table in Statistical Tables represents the probability from zero to the specific Z value noted on the horizontal
axis, Z.
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Supply Chain Program Pre-Reads

The only problem is that even with this table, it would be a ridiculous coincidence that our data had a mean of zero
and a standard deviation of one. The solution is to convert the distribution we have with its mean and standard
deviation to this new Standard Normal Distribution. The Standard Normal has a random variable called Z.

Using the standard normal table, typically called the normal table, to find the probability of one standard deviation,
go to the Z column, reading down to 1.0 and then read at column 0. That number, 0.3413 is the probability from
zero to 1 standard deviation. At the top of the table is the shaded area in the distribution which is the probability
for one standard deviation. The table has solved our integral calculus problem. But only if our data has a mean of
zero and a standard deviation of 1.
However, the essential point here is, the probability for one standard deviation on one normal distribution is the
same on every normal distribution. If the population data set has a mean of 10 and a standard deviation of 5 then
the probability from 10 to 15, one standard deviation, is the same as from zero to 1, one standard deviation on the
standard normal distribution. To compute probabilities, areas, for any normal distribution, we need only to convert
the particular normal distribution to the standard normal distribution and look up the answer in the standardizing
formula

where Z is the value on the standard normal distribution, X is the value from a normal distribution one wishes to
convert to the standard normal, μ and σ are, respectively, the mean and standard deviation of that population.
Note that the equation uses μ and σ which denotes population parameters. This is still dealing with probability so
we always are dealing with the population, with known parameter values and a known distribution. It is also
important to note that because the normal distribution is symmetrical it does not matter if the z-score is positive
or negative when calculating a probability. One standard deviation to the left (negative Z-score) covers the same
area as one standard deviation to the right (positive Z-score). This fact is why the Standard Normal tables do not
provide areas for the left side of the distribution. Because of this symmetry, the Z-score formula is sometimes
written as:

Where the vertical lines in the equation means the absolute value of the number.

What the standardizing formula is really doing is computing the number of standard deviations X is from the
mean of its own distribution. The standardizing formula and the concept of counting standard deviations from the
mean is the secret of all that we will do in this statistics class. The reason this is true is that all of statistics boils
down to variation, and the counting of standard deviations is a measure of variation.
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Supply Chain Program Pre-Reads

EXAMPLE
The final exam scores in a statistics class were normally distributed with a mean of 63 and a standard deviation of five.
a. Find the probability that a randomly selected student scored more than 65 on the exam.
b. Find the probability that a randomly selected student scored less than 85.

Solution
a. Let X = a score on the final exam. X ~ N(63, 5), where μ = 63 and σ = 5.
Draw a graph.
Then, find P(x > 65).
P(x > 65) = 0.3446

P(x ≥ x1) = P(Z ≥ Z1) = 0.3446

The probability that any student selected at random scores more than 65 is 0.3446. Here is how we found this answer.
The normal table provides probabilities from zero to the value Z1. For this problem the question can be written as: P(X ≥ 65) = P(Z ≥ Z1), which
is the area in the tail. To find this area the formula would be 0.5 – P(X ≤ 65). One half of the probability is above the mean value because this is
a symmetrical distribution. The graph shows how to find the area in the tail by subtracting that portion from the mean, zero, to the Z1 value. The
final answer is: P(X ≥ 63) = P(Z ≥ 0.4) = 0.3446
z = 65 – 63 /5= 0.4
Area to the left of Z1 to the mean of zero is 0.1554
P(x > 65) = P(z > 0.4) = 0.5 – 0.1554 = 0.3446
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Central Limit Theorem

Why are we so concerned with means? Two reasons are: they give us a middle ground for comparison, and they
are easy to calculate. In this chapter, you will study means and the Central Limit Theorem.

The Central Limit Theorem is one of the most powerful and useful ideas in all of statistics. The Central Limit
Theorem is a theorem which means that it is NOT a theory or just somebody's idea of the way things work. As a
theorem it ranks with the Pythagorean Theorem, or the theorem that tells us that the sum of the angles of a triangle
must add to 180. These are facts of the ways of the world rigorously demonstrated with mathematical precision
and logic. As we will see this powerful theorem will determine just what we can, and cannot say, in inferential
statistics. The Central Limit Theorem is concerned with drawing finite samples of size n from a population with a
known mean, μ, and a known standard deviation, σ. The conclusion is that if we collect samples of size n with a
"large enough n," calculate each sample's mean, and create a histogram (distribution) of those means, then the
resulting distribution will tend to have an approximate normal distribution.

The astounding result is that it does not matter what the distribution of the original population is, or
whether you even need to know it. The important fact is that the distribution of sample means tend to
follow the normal distribution.

The size of the sample, n, that is required in order to be "large enough" depends on the original population from
which the samples are drawn (the sample size should be at least 30 or the data should come from a normal
distribution). If the original population is far from normal, then more observations are needed for the sample means.
Sampling is done randomly and with replacement in the theoretical model.

The sampling distribution is a theoretical distribution. It is created by taking many samples of size n from a
population. Each sample mean is then treated like a single observation of this new distribution, the sampling
distribution. The genius of thinking this way is that it recognizes that when we sample we are creating an
observation and that observation must come from some particular distribution. The Central Limit Theorem answers
the question: from what distribution did a sample mean come? If this is discovered, then we can treat a sample
mean just like any other observation and calculate probabilities about what values it might take on. We have
effectively moved from the world of statistics where we know only what we have from the sample, to the world of
probability where we know the distribution from which the sample mean came and the parameters of that
distribution.

The reasons that one samples a population are obvious. The time and expense of checking every invoice to
determine its validity or every shipment to see if it contains all the items may well exceed the cost of errors in billing
or shipping. For some products, sampling would require destroying them, called destructive sampling. One such
example is measuring the ability of a metal to withstand saltwater corrosion for parts on ocean going vessels.

Sampling thus raises an important question; just which sample was drawn. Even if the sample were randomly
drawn, there are theoretically an almost infinite number of samples. With just 100 items, there are more than 75
million unique samples of size five that can be drawn. If six are in the sample, the number of possible samples
increases to just more than one billion. Of the 75 million possible samples, then, which one did you get? If there is
variation in the items to be sampled, there will be variation in the samples. One could draw an "unlucky" sample
and make very wrong conclusions concerning the population. This recognition that any sample we draw is really
only one from a distribution of samples provides us with what is probably the single most important theorem is
statistics: the Central Limit Theorem. Without the Central Limit Theorem it would be impossible to proceed to
inferential statistics from simple probability theory. In its most basic form, the Central Limit Theorem states that
regardless of the underlying probability density function of the population data, the theoretical distribution of the
means of samples from the population will be normally distributed. In essence, this says that the mean of a sample
should be treated like an observation drawn from a normal distribution. The Central Limit Theorem only holds if
the sample size is "large enough" which has been shown to be only 30 observations or more.
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Notice that the horizontal axis in the top panel is labeled X. These are the individual observations of the population.
This is the unknown distribution of the population values. The graph is purposefully drawn all squiggly to show
that it does not matter just how odd ball it really is. Remember, we will never know what this distribution looks like,
or its mean or standard deviation for that matter.
The horizontal axis in the bottom panel is labeled X This is the theoretical distribution called the sampling
distribution of the means. Each observation on this distribution is a sample mean. All these sample means were
calculated from individual samples with the same sample size. The theoretical sampling distribution contains all of
the sample mean values from all the possible samples that could have been taken from the population. Of course,
no one would ever actually take all of these samples, but if they did this is how they would look. And the Central
Limit Theorem says that they will be normally distributed.

The Central Limit Theorem goes even further and tells us the mean and standard deviation of this theoretical
distribution.

The practical significance of The Central Limit Theorem is that now we can compute probabilities for drawing a
sample mean, X–X–, in just the same way as we did for drawing specific observations, X's, when we knew the
population mean and standard deviation and that the population data were normally distributed.. The
standardizing formula has to be amended to recognize that the mean and standard deviation of the sampling
distribution, sometimes, called the standard error of the mean, are different from those of the population
distribution, but otherwise nothing has changed. The new standardizing formula is

Notice that µX–µX– in the first formula has been changed to simply µ in the second version. The reason is that
mathematically it can be shown that the expected value of µX–µX– is equal to µ. This was stated in TABLE
above. Mathematically, the E(x) symbol read the “expected value of x”. This formula will be used in the next
unit to provide estimates of the unknown population parameter μ.
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Confidence Interval

Suppose you were trying to determine the mean rent of a two-bedroom apartment in your town. You might look in
the classified section of the newspaper, write down several rents listed, and average them together. You would
have obtained a point estimate of the true mean. If you are trying to determine the percentage of times you make
a basket when shooting a basketball, you might count the number of shots you make and divide that by the number
of shots you attempted. In this case, you would have obtained a point estimate for the true proportion the parameter
p in the binomial probability density function.

We use sample data to make generalizations about an unknown population. This part of statistics is called
inferential statistics. The sample data help us to make an estimate of a population parameter. We realize
that the point estimate is most likely not the exact value of the population parameter, but close to it. After calculating
point estimates, we construct interval estimates, called confidence intervals. What statistics provides us beyond a
simple average, or point estimate, is an estimate to which we can attach a probability of accuracy, what we will
call a confidence level. We make inferences with a known level of probability.

Hypothesis Testing with one Sample

Now we are down to the bread and butter work of the statistician: developing and testing hypotheses. It is important
to put this material in a broader context so that the method by which a hypothesis is formed is understood
completely. Using textbook examples often clouds the real source of statistical hypotheses.

Statistical testing is part of a much larger process known as the scientific method. This method was developed
more than two centuries ago as the accepted way that new knowledge could be created. Until then, and
unfortunately even today, among some, "knowledge" could be created simply by some authority saying something
was so, ipso dicta. Superstition and conspiracy theories were (are?) accepted uncritically.

The scientific method, briefly, states that only by following a careful and specific process can some assertion be
included in the accepted body of knowledge. This process begins with a set of assumptions upon which a theory,
sometimes called a model, is built. This theory, if it has any validity, will lead to predictions; what we call
hypotheses.

As an example, in Microeconomics the theory of consumer choice begins with certain assumption concerning
human behavior. From these assumptions a theory of how consumers make choices using indifference curves
and the budget line. This theory gave rise to a very important prediction, namely, that there was an inverse
relationship between price and quantity demanded. This relationship was known as the demand curve. The
negative slope of the demand curve is really just a prediction, or a hypothesis, that can be tested with statistical
tools.

Unless hundreds and hundreds of statistical tests of this hypothesis had not confirmed this relationship, the so-
called Law of Demand would have been discarded years ago. This is the role of statistics, to test the hypotheses
of various theories to determine if they should be admitted into the accepted body of knowledge; how we
understand our world. Once admitted, however, they may be later discarded if new theories come along that make
better predictions.
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Not long ago two scientists claimed that they could get more energy out of a process than was put in. This caused
a tremendous stir for obvious reasons. They were on the cover of Time and were offered extravagant sums to
bring their research work to private industry and any number of universities. It was not long until their work was
subjected to the rigorous tests of the scientific method and found to be a failure. No other lab could replicate their
findings. Consequently they have sunk into obscurity and their theory discarded. It may surface again when
someone can pass the tests of the hypotheses required by the scientific method, but until then it is just a curiosity.
Many pure frauds have been attempted over time, but most have been found out by applying the process of the
scientific method.

This discussion is meant to show just where in this process statistics falls. Statistics and statisticians are not
necessarily in the business of developing theories, but in the business of testing others' theories. Hypotheses
come from these theories based upon an explicit set of assumptions and sound logic. The hypothesis comes first,
before any data are gathered. Data do not create hypotheses; they are used to test them. If we bear this in mind
as we study this section the process of forming and testing hypotheses will make more sense.

One job of a statistician is to make statistical inferences about populations based on samples taken from the
population. Confidence intervals are one way to estimate a population parameter. Another way to make a
statistical inference is to make a decision about the value of a specific parameter. For instance, a car dealer
advertises that its new small truck gets 35 miles per gallon, on average. A tutoring service claims that its method
of tutoring helps 90% of its students get an A or a B. A company says that women managers in their company
earn an average of $60,000 per year.

A statistician will make a decision about these claims. This process is called "hypothesis testing." A hypothesis
test involves collecting data from a sample and evaluating the data. Then, the statistician makes a decision as to
whether or not there is sufficient evidence, based upon analyses of the data, to reject the null hypothesis.
In this chapter, you will conduct hypothesis tests on single means and single proportions. You will also learn about
the errors associated with these tests.

Null hypothesis and alternate hypothesis

The actual test begins by considering two hypotheses. They are called the null hypothesis and the alternative
hypothesis. These hypotheses contain opposing viewpoints.

H0: The null hypothesis: It is a statement of no difference between the variables–they are not related. This can
often be considered the status quo and as a result if you cannot accept the null it requires some action.
Ha: The alternative hypothesis: It is a claim about the population that is contradictory to H0 and what we
conclude when we cannot accept H0.

This is usually what the researcher is trying to prove. The alternative hypothesis is the contender and must win
with significant evidence to overthrow the status quo. This concept is sometimes referred to the tyranny of the
status quo because as we will see later, to overthrow the null hypothesis takes usually 90 or greater confidence
that this is the proper decision.

Since the null and alternative hypotheses are contradictory, you must examine evidence to decide if you have
enough evidence to reject the null hypothesis or not. The evidence is in the form of sample data.
After you have determined which hypothesis the sample supports, you make a decision. There are two options
for a decision.

They are "cannot accept H0" if the sample information favors the alternative hypothesis or "do not reject H0" or
"decline to reject H0" if the sample information is insufficient to reject the null hypothesis. These conclusions are
all based upon a level of probability, a significance level, that is set my the analyst.
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Below table presents the various hypotheses in the relevant pairs. For example, if the null hypothesis is equal to
some value, the alternative has to be not equal to that value.

The four possible outcomes in the table are:

1. The decision is cannot reject H0 when H0 is true (correct decision).
2. The decision is cannot accept H0 when H0 is true (incorrect decision known as aType I error). This case
is described as "rejecting a good null". As we will see later, it is this type of error that we will guard against
by setting the probability of making such an error. The goal is to NOT take an action that is an error.
3. The decision is cannot reject H0 when, in fact, H0 is false (incorrect decision known as a Type II error).
This is called "accepting a false null". In this situation you have allowed the status quo to remain in force
when it should be overturned. As we will see, the null hypothesis has the advantage in competition with the
alternative.
4. The decision is cannot accept H0 when H0 is false (correct decision).

Each of the errors occurs with a particular probability. The Greek letters α and β represent the probabilities.

α = probability of a Type I error = P(Type I error) = probability of rejecting the null hypothesis when the null
hypothesis is true: rejecting a good null.

β = probability of a Type II error = P(Type II error) = probability of not rejecting the null hypothesis when the null
hypothesis is false. (1 − β) is called the Power of the Test.

α and β should be as small as possible because they are probabilities of errors.

Statistics allows us to set the probability that we are making a Type I error. The probability of making a Type I error
is α.
Recall that the confidence intervals in the last unit were set by choosing a value called Zα (or tα) and the alpha
value determined the confidence level of the estimate because it was the probability of the interval failing to capture
the true mean (or proportion parameter p). This alpha and that one are the same.
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Hypothesis testing with 2 samples

Studies often compare two groups. For example, researchers are interested in the effect aspirin has in preventing
heart attacks. Over the last few years, newspapers and magazines have reported various aspirin studies involving
two groups. Typically, one group is given aspirin and the other group is given a placebo. Then, the heart attack
rate is studied over several years.

There are other situations that deal with the comparison of two groups. For example, studies compare various diet
and exercise programs. Politicians compare the proportion of individuals from different income brackets who might
vote for them. Students are interested in whether SAT or GRE preparatory courses really help raise their scores.
Many business applications require comparing two groups. It may be the investment returns of two different
investment strategies, or the differences in production efficiency of different management styles.

To compare two means or two proportions, you work with two groups. The groups are classified either as
independent or matched pairs. Independent groups consist of two samples that are independent, that is,
sample values selected from one population are not related in any way to sample values selected from the other
population. Matched pairs consist of two samples that are dependent. The parameter tested using matched pairs
is the population mean. The parameters tested using independent groups are either population means or
population proportions of each group.

The comparison of two independent population means is very common and provides a way to test the hypothesis
that the two groups differ from each other. Is the night shift less productive than the day shift, are the rates of
return from fixed asset investments different from those from common stock investments, and so on? An observed
difference between two sample means depends on both the means and the sample standard deviations. Very
different means can occur by chance if there is great variation among the individual samples. The test statistic will
have to account for this fact. The test comparing two independent population means with unknown and possibly
unequal population standard deviations is called the Aspin-Welch t-test. The degrees of freedom formula we will
see later was developed by Aspin-Welch.

When we developed the hypothesis test for the mean and proportions we began with the Central Limit Theorem.
We recognized that a sample mean came from a distribution of sample means, and sample proportions came from
the sampling distribution of sample proportions. This made our sample parameters, the sample means and sample
proportions, into random variables. It was important for us to know the distribution that these random variables
came from. The Central Limit Theorem gave us the answer: the normal distribution. Our Z and t statistics came
from this theorem. This provided us with the solution to our question of how to measure the probability that a
sample mean came from a distribution with a particular hypothesized value of the mean or proportion. In both
cases that was the question: what is the probability that the mean (or proportion) from our sample data came from
a population distribution with the hypothesized value we are interested in?

Now we are interested in whether or not two samples have the same mean. Our question has not changed: Do
these two samples come from the same population distribution? To approach this problem we create a new
random variable. We recognize that we have two sample means, one from each set of data, and thus we have
two random variables coming from two unknown distributions. To solve the problem we create a new random
variable, the difference between the sample means. This new random variable also has a distribution and, again,
the Central Limit Theorem tells us that this new distribution is normally distributed, regardless of the underlying
distributions of the original data. A graph may help to understand this concept.
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Pictured are two distributions of data, X1 and X2, with unknown means and standard deviations. The second
panel shows the sampling distribution of the newly created random variable (X−1−X−2 ) This distribution is the
theoretical distribution of many sample means from population 1 minus sample means from population 2. The
Central Limit Theorem tells us that this theoretical sampling distribution of differences in sample means is
normally distributed, regardless of the distribution of the actual population data shown in the top panel. Because
the sampling distribution is normally distributed, we can develop a standardizing formula and calculate
probabilities from the standard normal distribution in the bottom panel, the Z distribution.

The Central Limit Theorem, as before, provides us with the standard deviation of the sampling distribution, and
further, that the expected value of the mean of the distribution of differences in sample means is equal to the
differences in the population means. Mathematically this can be stated.

Because we do not know the population standard deviations, we estimate them using the two sample standard
deviations from our independent samples. For the hypothesis test, we calculate the estimated standard
deviation, or standard error, of the difference in sample means, X¯¯¯1 – X¯¯¯2
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We remember that substituting the sample variance for the population variance when we did not have the
population variance was the technique we used when building the confidence interval and the test statistic for
the test of hypothesis for a single mean back in Confidence Intervals and Hypothesis Testing with One
Sample. The test statistic (t-score) is calculated as follows:

where:

 s1 and s2, the sample standard deviations, are estimates of σ1 and σ2, respectively and
 σ1 and σ2 are the unknown population standard deviations.
 x¯1x¯1 and x¯2x¯2 are the sample means. μ1 and μ2 are the unknown population means.

The number of degrees of freedom (df) requires a somewhat complicated calculation. The df are not always a
whole number. The test statistic above is approximated by the Student's t-distribution with df as follows:

When both sample sizes n1 and n2 are 30 or larger, the Student's t approximation is very good. If each sample
has more than 30 observations then the degrees of freedom can be calculated as n1 + n2 - 2.

The format of the sampling distribution, differences in sample means, specifies that the format of the null and
alternative hypothesis is:

H0: µ1−µ2=δ0
Ha: µ1−µ2≠δ0

where δ0 is the hypothesized difference between the two means. If the question is simply “is there any difference
between the means?” then δ0 = 0 and the null and alternative hypotheses becomes:

H0: µ1=µ2
Ha: µ1≠µ2

An example of when δ0 might not be zero is when the comparison of the two groups requires a specific
difference for the decision to be meaningful. Imagine that you are making a capital investment. You are
considering changing from your current model machine to another. You measure the productivity of your
machines by the speed they produce the product. It may be that a contender to replace the old model is faster in
terms of product throughput, but is also more expensive. The second machine may also have more maintenance
costs, setup costs, etc. The null hypothesis would be set up so that the new machine would have to be better
than the old one by enough to cover these extra costs in terms of speed and cost of production. This form of the
null and alternative hypothesis shows how valuable this particular hypothesis test can be. For most of our work
we will be testing simple hypotheses asking if there is any difference between the two distribution means.
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Chi Square Distribution

Have you ever wondered if lottery winning numbers were evenly distributed or if some numbers occurred with a greater frequency?
How about if the types of movies people preferred were different across different age groups? What about if a coffee machine was
dispensing approximately the same amount of coffee each time? You could answer these questions by conducting a hypothesis test.
You will now study a new distribution, one that is used to determine the answers to such questions. This distribution is called the chi-
square distribution.
In this chapter, you will learn the three major applications of the chi-square distribution:

1. the goodness-of-fit test, which determines if data fit a particular distribution, such as in the lottery example
2. the test of independence, which determines if events are independent, such as in the movie example
3. the test of a single variance, which tests variability, such as in the coffee example
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ANOVA

Many statistical applications in psychology, social science, business administration, and the natural sciences involve several groups.
For example, an environmentalist is interested in knowing if the average amount of pollution varies in several bodies of water. A
sociologist is interested in knowing if the amount of income a person earns varies according to his or her upbringing. A consumer
looking for a new car might compare the average gas mileage of several models.

For hypothesis tests comparing averages among more than two groups, statisticians have developed a method called "Analysis of
Variance" (abbreviated ANOVA). In this chapter, you will study the simplest form of ANOVA called single factor or one-way ANOVA.
You will also study the F distribution, used for one-way ANOVA, and the test for differences between two variances. This is just a
very brief overview of one-way ANOVA. One-Way ANOVA, as it is presented here, relies heavily on a calculator or computer.
The purpose of a one-way ANOVA test is to determine the existence of a statistically significant difference among several group
means. The test actually uses variances to help determine if the means are equal or not. In order to perform a one-way ANOVA test,
there are five basic assumptions to be fulfilled:

1. Each population from which a sample is taken is assumed to be normal.

2. All samples are randomly selected and independent.
3. The populations are assumed to have equal standard deviations (or variances).
4. The factor is a categorical variable.
5. The response is a numerical variable.

6. The null hypothesis is simply that all the group population means are the same. The alternative hypothesis is that at least
one pair of means is different. For example, if there are k groups:
7. H0:μ1=μ2=μ3=. . .μk
8. HaHa: At least two of the group means μ1,μ2,μ3,. . . . . . ,μk are not equal. That is, μi≠μj ≠ μj for some i≠ji ≠ j.
9. The graphs, a set of box plots representing the distribution of values with the group means indicated by a horizontal line
through the box, help in the understanding of the hypothesis test. In the first graph (red box plots), H0: μ1 = μ2 = μ3 and the
three populations have the same distribution if the null hypothesis is true. The variance of the combined data is
approximately the same as the variance of each of the populations.
10. If the null hypothesis is false, then the variance of the combined data is larger which is caused by the different means as
shown in the second graph (green box plots).
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F- Statistics
The distribution used for the hypothesis test is a new one. It is called the F distribution, invented by George Snedecor but named in
honor of Sir Ronald Fisher, an English statistician. The F statistic is a ratio (a fraction). There are two sets of degrees of freedom;
one for the numerator and one for the denominator.
For example, if F follows an F distribution and the number of degrees of freedom for the numerator is four, and the number of degrees
of freedom for the denominator is ten, then F ~ F4,10.
To calculate the F ratio, two estimates of the variance are made.

1. Variance between samples: An estimate of σ2 that is the variance of the sample means multiplied by n (when the sample
sizes are the same.). If the samples are different sizes, the variance between samples is weighted to account for the different
sample sizes. The variance is also called variation due to treatment or explained variation.
2. Variance within samples: An estimate of σ2 that is the average of the sample variances (also known as a pooled variance).
When the sample sizes are different, the variance within samples is weighted. The variance is also called the variation due
to error or unexplained variation.
 SSbetween = the sum of squares that represents the variation among the different samples
 SSwithin = the sum of squares that represents the variation within samples that is due to chance.

To find a "sum of squares" means to add together squared quantities that, in some cases, may be weighted.
MS means "mean square." MSbetween is the variance between groups, and MSwithin is the variance within groups.
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F Ratio and F Statistic

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Normal table
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References

openstax.org
An Introduction to Statistical Learning: with Applications in R (Springer Texts in Statistics)

https://www.sjsu.edu/faculty/gerstman/EpiInfo/z-table.htm
References

openstax.org
An Introduction to Statistical Learning: with Applications in R (Springer Texts in Statistics)