Linear Regression

Causal method of forecasting Assess relationship between dependent

variable and predictor variable(s) Simple linear regression: Simple One independent variable Linear Straight-line relationship

Linear Regression
Aim: To find the straight line
mathematically closest to the data Method of Ordinary Least Squares: Minimises sum of square of vertical deviations of data from line

Linear Regression
Equation of straight line: y = a + bx
nxy xy b 2 2 n x ( x )

a y

bx

b represents gradient a represents intercept

Linear Regression Example 2.

Scatter Graph
7600
Total Cost ()

7400 7200 7000 6800 6600 6400 20 30 40 Output (units) 50 60

Regression Analysis
x 26 30 33 44 48 49 230 y 6566 6510 6800 6985 7380 7310 41551 x 676 900 1089 1936 2304 2401 9306
2

xy 170716 195300 224400 307340 354240 358190 1610186

Linear Regression

b = 35.55 a = 5562 Equation of line: y = 5562 + 35.55 x b increase in total cost per unit increase in output a total cost if output is zero (fixed) y is dependent variable (effect / uncontrollable) x is independent variable (cause / controllable or time)

Forecasting
Forecast total cost; x = 45 and x = 60 y = 5562 + 35.55 x 45 = 7162 y = 5562 + 35.55 x 60 = 7695 Interpolation: Forecasting within range

of data Extrapolation: Forecasting outside range of data