Probability: Its Use in Business

Probability: Its Use in Business Statistics Business, one might say, is an exercise in probability. No one knows exactly what the market will do in the future, not even the most skilled analysts and prognosticators. One can only make educated guesses, and the use of probability models and statistics enables the professional to make such guesses, even though, no consumer behaves perfectly according to mathematical economic metric models.

If used correctly, statistical analysis can be important guides that enable one to purse intelligent business practices and function as aids in the decision making process, even though they are only, ultimately projected 'guesses' as to how the economic environment will evolve, given a variety of variable factors. Probability, in its most ideal mathematical form, attempts to make use of various concepts to determine what is likely to occur, given a particular set of variable circumstances.

One of the most important uses of probability in business is to determine what a particular consumer market's spending habits are likely to be, given a particular set of events.

For instance, if the Federal Reserve lowers interest rates yet again, and consumer spending is likely to increase, what is the most desirable course of action, in terms of production of a business that manufactures durable goods, if all other market aspects remain relatively unchanged? Probability theory can also be used to assess what to do if a new and potentially variable competitor advances into a market, pricing comparable goods competitively against one's own product line.

What will consumers do, and how will the market behave, given these circumstances? Probability theory thus deals with what is variable and also with what is unknown in projected circumstances or futures. One must know certain fixed attributes about the circumstances, such as certain fixed production costs, but the use of probability theory allows for the introduction of a set of uncertain or variable factors.

Thus, the use statistical probability attempts to project a variety of foreseeable futures, so the businessperson can prepare for the possible negative aspects of these foreseeable futures. These unknowns are represented, in equations, as variables or unknowns. Various scenarios can be plugged into these placeholders, represented as 'xy' in integral calculus functions. Of course, it could be argued that very often there is more than one unknown in business. All models are not perfect mirrors of reality, merely guides for the business professional.

But the models of basic integral calculus allow a businessperson to at least apply a few indeterminate variables or scenarios to a model, to price a particular product. For instance, when desiring to create a new product -- say, for instance, a shrimp-flavored potato chip, to be marketed in the United States, one might first conduct a marketing survey of a base of customers, to determine how much these consumers would be willing to pay for such a product.

Usually, the cheaper the product, the more consumers would be willing or interested in adding such a product to their biweekly shopping list, although this is not uniformly the case -- with certain luxury products the price and the unavailability of a product is part of its attraction. A manager would then, after plotting such responses of consumers to pricing scenarios upon a graph, would pair these against a given set of current and possible economic circumstances.

Consumers would no doubt be more willing to pay more for potato chips in a healthy economy, given that such goods are not necessities. Then, the marketer would attempt to determine what price different.