BSA CORE 1

MANAGERIAL ECONOMICS

MODULE 6
ESTIMATING AND FORECASTING DEMAND

REGRESSION ANALYSIS
 Regression analysis is a set of statistical techniques using past observations to
find (or estimate) the equation that best summarizes the relationships among key
economic variables.
 The method requires that analysts:
o (1) collect data on the variables in question
o (2) specify the form of the equation relating the variables
o (3) estimate the equation coefficients
o (4) evaluate the accuracy of the equation.
 Regression equation

Regression line = Y = a + bXt

Where:
Y = dependent variable
X = independent variable
a = intercept
b = slope
t = time period
To compute b:
b = ∑(Xt - x̅) (Yt - ȳ)
∑(Xt - x̅)2

To compute x̅:

x̅ = ∑X where: n = number of period

n
To compute ȳ:

ȳ = ∑Y
n

To compute a:
a = ȳ - bx̅
EXAMPLE
Year Sales Yt - ȳ Yt - ȳ Ads expenses Xt - x̅ Xt - x̅ (Xt - x̅ ) (Yt - ȳ) (Xt - x̅ ) (Yt - ȳ) (Xt - x̅)2 (Xt - x̅)2
t Y X
1 44 44 - 50 = -6 10 10 - 12 = -2 -2 x -6 = 12 (-2)2 = 4
2 40 40 - 50 = -10 9 9 - 12 = -3 -3 x -10 = 30 (-3)2 = 9
3 42 42 - 50 = -8 11 11 - 12 = -1 -1 x -8 = 8 (-1)2 = 1
4 46 46 - 50 = -4 12 12 - 12 = 0 0 x -4 = 0 (0)2 = 0
5 48 48 - 50 = -2 11 11 - 12 = -1 -1 x -2 = 2 (-1)2 = 1
6 52 52 - 50 = 2 12 12 - 12 = 0 0 x2= 0 (0)2 = 0
7 54 54 - 50 = 4 13 13 - 12 = 1 1x4= 4 (1)2 = 1
8 58 58 - 50 = 8 13 13 - 12 = 1 1x8= 8 (1)2 = 1
9 56 56 - 50 = 6 14 14 - 12 = 2 2x6= 12 (2)2 = 4
10 60 60 - 50 = 10 15 15 - 12 = 3 3 x 10 = 30 (3)2 = 9
n = 10 ∑Y = 500 ∑X = 120 ∑(Xt - x̅ ) (Yt - ȳ) = 106 ∑(Xt - x̅)2 = 30
ȳ = 500/10 x̅ = 120/10
ȳ = 50 x̅ = 12

b = ∑(Xt - x̅) (Yt - ȳ) = 106 = 3.53

 ∑(Xt - x̅)2 30

a = ȳ - bx̅ = 50 – 3.53(12) = 7.64

Y = a + bX
Y = 7.64 + 3.53X

If X = 0 ; Y = 7.64 + 3.53(0) = $7.64

If X = 1; Y = 7.64 + 3.53(1) = $11.17
If X = 2; Y = 7.64 + 3.53(2) = $14.70
 Observation – as X (ads expenses) increases, Y (sales = demand) also
increases
 Conclusion – As ads expenses increases, sales increases.