ECON1203: Statistics

Chapter 6: Probability

ECON1203: Statistics
Chapter 6: Probability
1. Terminology

A random experiment is an action or process that leads to one of

several possible outcomes.

A sample space of a random experiment is a list of all possible outcomes

of the experiment. The outcomes must be exhaustive and mutually
exclusive:

S= {O1 , O2 , , Ok }

The requirements of probabilities are:

1. The probability of any outcome must lie between 0 and 1:

0 P ( Oi ) 1
2. The sum of the probabilities of all the outcomes must be 1:
k

P ( Oi )=1
i=1

An event is a collection or set of one or more simple events in a sample

space.

The probability of an event is the sum of the probabilities of the simple

events that constitute the event.

2. Approaches to assigning probabilities

1. The classical approach determines probabilities in games of chance (e.g.
heads and tails).
2. The relative frequency approach defines probability as the long-run
relative frequency with which an outcome occurs (e.g. if 200 of 1000
students got a distinction, the relative frequency is 20%).
3. The subjective approach defines probability as the degree of belief that
we hold in the occurrence of an event.

ECON1203: Statistics

Chapter 6: Probability

3. Joint, marginal and conditional probability

The intersection (joint probability) of events

event that occurs when both

and

and

is the

occur. It is denoted as

B .

The marginal probability is computed by adding across rows or down

columns.

The conditional probability is the probability of event

B :

P ( A|B )=

Two events

given event

P ( AB )
P ( B)

and

are independent if:

P ( A|B )=P( A)

4. Probability rules and trees

The complement rule of event

does not occur:

is the event that occurs when event

P ( A C )=1P ( A )

The multiplication rule calculates the joint probability of two events:

P ( AB )=P ( B ) P ( A|B )

The multiplication rule for independent events is:

P ( AB )=P ( A ) P ( B )

The addition rule calculates the probability of the union of two events:

P ( AB )=P ( A ) + P ( B )P ( AB )

The addition rule for mutually exclusive events is:

P ( AB )=P ( A ) + P ( B )