Section 7.1

Basic Concepts of Probability

How likely is that a product produced by a business is defective? How likely is the closing price of a certain stock to be higher than the closing price on the day before? How likely are you to use less than 2 gigabytes of data per month on your cell phone? Questions like these fall into the realm of probability. They reflect the uncertainty involved in business and finance. If we can answer these questions in some mathematical way, we can use the results to make intelligent decisions.

Probability is simply the likelihood of some event occurring. In this section, we’ll learn how to assign a number from 0 to 1 that reflects how likely an event will occur. A probability of 0 means the event will not occur. A probability of 1 means the event will occur. A probability between 0 and 1 reflects varying degrees to which the event might occur. If the chance of rain is 0.1 (often read as a 10% chance of rain), it probably won’t rain. However, a probability of 0.9 (a 90% chance of rain) indicates that it probably will rain. A 50% chance of rain (probability equal to 0.5) means is just as likely to rain as not rain.

In this section we will define probability and learn how to assign probability to events.