Chapter-2: Basic Tools

Lecture-5
Regression Analysis

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 Chapter-2: Basic Tools
Regression Techniques:
The statistical tools with the help to
which we are in a position to estimate
(predict) the unknown values of one
variable from known values of another
variables called regression

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 Chapter-2: Basic Tools
The regression analysis helps in three
important ways:
1. It provides estimates of values of the
dependent variables from the values of
the independent variables
2. Obtain the measure of the error
involve in using the regression lines as a
basis for estimation
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 Chapter-2: Basic Tools
3. We
We can
can obtain
obtain aa measure
measure of
of degree
degree of
of
association or correlation that exists
between the two variables.
The estimation of demand function using
econometric techniques involve the
following steps:
i. Identification of the variables
ii. Collection of the data
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 Chapter-2: Basic Tools
iii. Specification of the demand model
iv. Estimation of the parameters and
their interpretations
v. Development of forecasts based on the
model.
Qd = B + aP is a demand function
The manager is interested to estimate the
coefficient a and b of the function.
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 Chapter-2: Basic Tools

Y = a +bX is a total cost function

b is slope = (Y2- Y1) / (X2-X1) i.e.,
marginal cost

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 Chapter-2: Basic Tools
Example:
Total (Y-Y) = (X-X) = 87.08 +
Year TC (Y) output (X) y x x2 xy 12.21x

1 100 0 -137.14 -12.29 150.94 1684.90 87.08

2 150 5 -87.14 -7.29 53.08 634.90 148.13

3 160 8 -77.14 -4.29 18.37 330.61 184.76

4 240 10 2.86 -2.29 5.22 -6.53 209.18

5 230 15 -7.14 2.71 7.37 -19.39 270.23

6 370 23 132.86 10.71 114.80 1423.47 367.91

7 410 25 172.86 12.71 161.65 2197.76 392.33

  1660 86     511.43 6245.71  

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  237.14 12.29          
 Chapter-2: Basic Tools
Total output

500
400 410
370
300
Total cost

240 230
200
150 160
100 100
0
0 5 10 15 20 25 30
Output

Total output
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 Chapter-2: Basic Tools
Series1

450.00
400.00 392.33
367.91
350.00
300.00
270.23
250.00
Total Cost

200.00 209.18
184.76
150.00 148.13
100.00 87.08
50.00
0.00
0 5 10 15 20 25 30
Output

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 Chapter-2: Basic Tools
Testing Regression Estimates
(yt-y) (yt-y)2 (y`t) (y`t-y) (y`t-y)2 (yt-y`t) (yt-y`t)2
(yt) 100 -137.14 18808.16 87.08 -150.06 22518.86 12.92 166.93

150 -87.14 7593.88 148.13 -89.01 7923.29 1.87 3.50

160 -77.14 5951.02 184.76 -52.38 2743.96 -24.76 613.06

240 2.86 8.16 209.18 -27.96 781.92 30.82 949.87

230 -7.14 51.02 270.23 33.09 1094.76 -40.23 1618.45

370 132.86 17651.02 367.91 130.77 17100.05 2.09 4.37

410 172.86 29879.59 392.33 155.19 24083.05 17.67 312.23

1660   79942.86 1659.62   76245.89   3668.40

237.14     237.09         10
 Chapter-2: Basic Tools
Example:
Barg Price y= x= 170-
city er (Q) (P) (Y-Y) (x-x) x2 xy 4.375P
1 100 15 0 -1 1 0 104.375
2 90 18 -10 2 4 -20 91.25
3 85 19 -15 3 9 -45 86.875
4 110 14 10 -2 4 -20 108.75
5 120 13 20 -3 9 -60 113.125
6 90 19 -10 3 9 -30 86.875
7 105 16 5 0 0 0 100
8 100 14 0 -2 4 0 108.75
  800 128     40 -175  
  100 16           11
 Chapter-2: Basic Tools
Example:
salesma Test
n score Sales y x x2 xy
1 40 2.5 -20 -1.5 2.25 30
2 70 6 10 2 4 20
3 50 4 -10 0 0 0
4 60 5 0 1 1 0
5 80 4 20 0 0 0
6 50 2.5 -10 -1.5 2.25 15
7 90 5.5 30 1.5 2.25 45
8 40 3 -20 -1 1 20
9 60 4.5 0 0.5 0.25 0
10 60 3 0 -1 1 0
  600 40     14 130
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 Chapter-2: Basic Tools
Problems with Regression Analysis:

There are four potential pitfalls of

regression analysis that are discussed
below:
i. Omitted variables
ii. Identification problem
iii. Multicollinearity
iv. Autocorrelation 13
 Chapter-2: Basic Tools
1. Omitted variables:
Economic theory can be used to specify those
variables that should be included in a
regression equation.
However, if there are variables that are
omitted, the results of regression can be
misleading.
When regression results are inconsistent with
economic theory, there may be the omission
of important variables.
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 Chapter-2: Basic Tools
2. Identification problem:
Another issue with regression analysis is
that problem identification. That means
that factor that affect demand may also
affect supply causing different
equilibrium position in the market. For
example, income, prices of other goods,
change of taste and preferences etc.
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3. Multicollinearity:
When two or more dependent variables
are highly correlated, the problem occurs
called multicollinearity.
4. Autocorrelation:
Sometimes the sequence of observation is
such that the error terms associated with
each observation is correlated.
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Chapter-2: Basic Tools

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Chapter-2: Basic Tools

Thank you

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