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We have seven people team and their running velocity is ~50 points(2 weeks sprint). Now due to change in business focus, we have to reduce team size from 7 to 4.
How do we plan current sprint? According to running velocity or let the team guess how much they can deliver.
If you reduce a team from 7 to 4, especially if the reason is something outside the team, the best course of action is probably to treat this as a completely new team. People will need to change into new roles, find a new way of working together, cover fresh weaknesses caused by those leaving, find out who is in charge of what, and all the other problems that a new team runs in to.
Cutting a team in half shouldn't be handled in a "business as usual" type of way; it's a pretty traumatic experience for the team, especially if they've been working together for a while. You could go all the way and run a new team introduction, but at the very least you should give them some time to reform and whatever velocity you have from the previous team can probably go out the window.
Doing whatever it is you normally do when planning with a new team will likely give the most reliable results. (The most reliable possible, that is. They probably won't be very reliable regardless.)
It's important to understand that a change in team dynamic should result in lost productivity, whether that change is a reduction or increase in team size. Requirements, knowledge share, and artifacts of each sprint are dependencies that need to be accounted for when a team change is made. The team should forecast their own sprint based on what they know today. If there's a large need for knowledge transfer, domain expertise, requirements gathering, and artifact inspection, the team should take these factors into account when planning the next sprint.
Using lagging indicators such as velocity are nice for planning purposes, but it's only part of the picture. Planning the first few days of the sprint at Sprint Planning and using the Daily Scrum to re-plan towards the sprint goal is your best course of action.
I suggest that you coach upwards and make them (management, portfolio, product, the powers that be) understand how changing the chemistry, even by removing or adding one individual could affect the teams ability to deliver at the same velocity as previously, not to mention basically halving the team. Coach them for the worst case scenario.
In terms of the team, I would have a backlog refinement session whereby they re-fresh their baseline estimates e.g. they re-estimate a past 1 point, 2 point and 3 point story given the smaller team. Once they have done this I would get the team refine around 20-30 SP's of stories.
Then when they go into the planning meeting they have a nice batch of stories which are ready for the next sprint and then I would just ask them what do they think they can deliver. As you say it would be a guestimate. Just tell them what do they feel comfortable committing to. If they say 10 SP's accept that. If they say more accept that. Do what the team feels comfortable with.
Initially, it would be productive and ideal to go as per your current teams delivering capacity rather than your previous team running velocity of ~50 points(Bi-weekly sprints(every 2 weeks)) because the team is smaller now and considering the same workload as it was earlier.
50 points running velocity for 7 members would come down to 7 or 8 story points per team member and to expect the same dynamics from 4 members in the current team would be definitely overloading your current team with additional work which in general is not easy to be completed unless the current 4 member team will be working overtime(extra hours) and also are at an expert skill level which is on par with the 3 members who are no more now in the team.
Also, try to conduct sprint planning meetings and sprint retrospection meetings for every sprint for the current 4 member team so that you can have an understanding of the delivering capacity, feedback about opinions on the tasks to be done.
